Kavanaugh v. Commonwealth Trust Co.

The defendant, a director of a trust company, has been sued to recover losses sustained by the company through his alleged neglect of duties. The courts below have decided in his favor. The sufficiency of the complaint was before us in 181 N. Y. 121 and 191 N. Y. 522 . Although a new trial must be had as the trial court failed to pass upon the issues presented by the pleadings, yet, in order to present the matter clearly, a statement of the principal facts involved is necessary.

The Trust' Company of the Republic, now the Commonwealth Trust Company, was organized under the Banking Law of the state of New York in March of 1902 with a capital of $1,000,000 and a surplus of $500,000, fully paid. The respondent, George J.jGould, became a director and qualified April 3, 1902, when he filed his oath with the banking department. He resigned as such director October 29, 1902. Within that time the trust company suffered heavy losses from bad management. Gould never attended the meetings of the directors nor acquainted himself with the business or methods of the trust company.

The law governing the duties of directors in financial institutions is well settled. They are summoned to the same degree of care and prudence that men prompted by self-interest generally exercise in their own affairs. (Hun v. Cary, 82 N. Y. 65 ; Cassidy v. Uhlmann, 170

By. arrangement with Mr. Gould when he became a director, he was not expected to attend the meetings or to take active part in the affairs of the company.

Upon the organization of the Trust Company of the Republic, Daniel Le Roy Dresser was elected president. He had been a very successful business man, stood well in the community, but was never a banker. He had never served as a director of a bank.

The by-laws adopted by the stockholders made provision for a board of directors of twenty-five and an executive committee consisting of the president and six other directors elected by the board. The executive committee had the powers of the board when the latter was not in session. For all investments in stocks, bonds, mortgages and personal securities the assent of the executive committee was necessary. The president, however, might be authorized by the executive committee to make investments in such securities without previously consulting it as to details, but all such transactions were to be reported at its next meeting. Tuesday of every week, at the main office of the company, was the meeting time for the executive committee. The directors were required to meet' at the same place on the third Tuesday

During the period in question, meetings of the board of directors were held on March 27th, April 15th, May 13th, June 17th, July 22d, September 16th and October 21st. The meeting which should have been held on August 19th, 1902, was passed. There was no meeting of the executive committee from the 22d day of July until the 9th of September.

Books were kept in which were recorded loans of various kinds and which were taken into the executive committee and board meetings, and were always open for inspection. The minutes of the executive committee, however, failed to show any loans reported to it or the nature of the securities taken for loans.

The losses sustained by the trust company were largely due to its connection with the United States Shipbuilding Company. It invested, so heavily in the bonds of this company as to bring ruin to the institution but. for

The United States Shipuilding Company was a project to acquire the plants of the Union Iron Works, San Francisco, California; the Bath Iron Works, Limited, and the Hyde Windlass Company, Bath, Maine; the Crescent Shipyard and the Samuel L. Moore & Sons Co., Elizabeth, N. J.; the Harlan & Hollingsworth Co., Wilmington, Delaware, and the Canda Manufacturing Co., Cartaret, New Jersey. The plan was to combine these plants and bring them into a single company, and it was proposed that such new company should issue $16,000,000 of five per cent gold bonds', secured by the consolidated properties, of which $9,000,000 should be offered to public subscription at not less than 95%. In addition it was proposed that $10,000,000 six per cent accumulative preferred, and $10,000,000 common stock should be issued. The prospectus of this proposition and organization was issued and circulated by the trust company in April of 1902. From this prospectus it appears that the Mercantile Trust Company was to be the trustee for the bonds, and the Trust Company of the Republic, bankers and transfer agents. The underwriters agreed with the Mercantile Trust Company to pay $900 for each $1,000 bond subscribed for by them, twenty-five per cent to be paid upon allotment and the balance upon the demand of the Mercantile Trust Company. All of the $9,000,000 required to organize and float the ship building company was not to be raised in this country; $3,000,000 was to be underwritten in London, $3,000,000 in Paris, and $3,000,000 in New York.

The underwriting agreement provided that with the consent of the Mercantile Trust Company any other concern could be included in. the combination. On June 14, .1902, the Trust Company of the Republic advertised

As the following persons and corporations will be mentioned later, it may be well to state their relation to the case. John W. Young was the promoter of the United States Shipbuilding Company. Charles E. Reiss was a partner of Dresser in Dresser & Company, a mercantile establishment. A. H. Engel was an employee of Dresser & Company. The Narrangansett Webbing Company and the American Tubing and Webbing Company were largely owned by Daniel Le Roy Dresser, the president of the trust company.

Beginning with April, 1902, and continuing through May and June, the trust company, through its president, speculated in its own stock, the purchase and sale thereof being carried in an account headed “ Advances.” This account, kept in the general ledger of the company, showed thirteen purchases in April, thirteen in May, and eight in June. The shares purchased were from 25 to 775, and the amount carried ran as high as $157,673.07. Transactions of this nature continued during every month up to the 13th of October. While there was no loss to the trust company upon these transactions, yet they were forbidden by law. (Banking Law [Cons. Laws, ch. 2], sec. 27, subd. 8; 1 Birdseye,

On April 30, 1902, the trust company loaned the Narrangansett Webbing Company $50,000 upon its note indorsed by G. M. Thurlow. This company, as already stated, was largely owned by Daniel Le Roy Dresser, the president of the trust company.

On June 23, 1902, a loan was made to John W. Young, the promoter, for $700 on his note secured, by stock of a company not yet organized, and on the following day he got $5,000 more on his note secured by an order- on Lewis Nixon for bonds of the United States .Shipbuilding Company.

On June 26th, 1902, $50,000 was loaned to- Charles E. Reiss, the partner of President Dresser. The collateral for this loan was $100,000 shipbuilding bonds and stock. A little later, A. H. Engel, an employee of Dresser & Company, was accepted by the trust company as debtor in place of Reiss.

On June 30, 1902, the trust company loaned to Etting and Petersen $800,000 secured by $500,000 of bonds of the shipbuilding company. This was in direct violation of section 25 of the Banking Law, which prohibited any loans on negotiable paper exceeding one-half of the actual paid-in capital stock and surplus of the company. While no loss occurred upon this loan, yet the illegal nature of the transaction was some indication of the president’s imprudence and daring.

On June 30, 1902, $100,000 was loaned to A. M. Kidder & Company, a copartnership of which Charles D. Marvin, a director of the trust company, and chairman of the executive committee, was a member. No resolution of the board of directors pursuant to section 27 of the Banking Law, subd. 7, authorized or approved this loan.

On the 12th of July the trust company loaned $2,500 to John W. Young on his note dated June 24th, the proceeds of which were payable to him in Paris and the security for which note was the same as that put up for the loan on June 24th.

On July 21st another loan of $50,000 was made by the trust company to Engel, the employee of Dresser & Company, on the collateral of $100,000 shipbuilding bonds.

In the latter part of June the trust company, under the direction of the president, made two fictitious loans, one for $75,000 on a note of A. M. Comacho, a clerk of Lewis Nixon, and another of $70,000 on a note of J. M. Bonner, a clerk of the trust company. These loans were entered and carried upon the books of the trust company and were shown in its semi-annual report of July 1, 1902, to the banking department as good assets. They were taken and carried for the purpose of hiding the amounts paid the trust company by John W. Young for its services as underwriter.

A jury might find that a director reasonably attentive to his company’s affairs, by July 22d should have had some knowledge of these transactions of the president. If Dresser’s testimony be true, the directors present at the meetings knew of all or some of these loans and transactions. If the president made no report of the loans, and the minutes of the executive committee did not show them, the directors present at the meetings at least knew of such omissions. They did know all about the shipbuilding company, that it was in the process of formation and had not yet been organized or completed, that its securities were in the form of underwriting agreements for bonds to be issued, and that its success as a financial undertaking depended upon the amount of the subscriptions; they also knew that the trust company was to be paid a commission for underwriting or procuring the underwriting of the bonds. This court has held that the authority to buy and sell stocks and bonds does not authorize a trust company to indulge in hazardous promoting schemes although it may hope from the successful launching of such schemes to make large commissions and receive large bonuses. (Gause v. Commonwealth Trust Co., 196 N. Y. 134 .)

As all these matters, therefore, were known or should

It is frequently stated in the evidence that the trust company was not to become financially involved with the shipbuilding company. Marvin, a director, says that he was unwilling to agree to the trust company taking any interest in the underwriting “ as I thought we were a young company and should pursue a very conservative course.” And yet according to Director Wetmore’s testimony no curb or check of any sort was placed upon Mr. Dresser’s control of the company.

What a director must do in exercising reasonable care in the performance of his duties is always dependent upon the facts. Care is a relative term. This Trust Company of the Republic was of recent origin; its business had not become established or its methods fixed. Its president was a merchant with apparently no banking experience. Whether a director in exercising reasonable care would have left such an institution without some scrutiny of its initial investments or supervision of its loans, or without directing the nature of its business policy, is a question of fact for the trial court.

The directors could, at least, have required the approval of the executive committee before money was advanced upon shipbuilding collateral.

Yet the directors did nothing, and Dresser went his own way.

These amounts were advanced to Bruckman and to White in response to calls made by the Mercantile Trust Company for payment upon their subscriptions. The moneys were not paid to them but passed to the shipbuilding account.

The daily deposits in the hands of the trust company amounted from a million to about two millions of dollars.

The shipbuilding deal was to be consummated on August 11th, at which time the properties of the various companies were to be taken over and paid for. On August 12th, the Bethlehem Steel Company deal was ■ to be carried through. As the time approached the money was not forthcoming. The underwriting had failed in London and in Paris, but the interests of the trust company in the shipbuilding venture were of such an extent that severe losses would ensue if the enterprise dropped through.

On the same day the trust company, under the direction of Dresser, made a loan to Lewis Nixon of $700,000 with a collateral of $900,000 of the shipbuilding company’s bonds and stock; and on the next day, August 12th, made a similar loan of $1,922,187.50, and in the first week of September loans were obtained from various banks upon the guaranty of the trust company, again by Dresser, which loans passed into the shipbuilding account, making a total of loans and guarantees of the Trust Company of the Republic made for the benefit of the United States Shipbuilding Company of over $4,100,000. Thus, inside of six months, the entire capital, surplus and deposits of the trust company were turned into a promotion scheme.

When, in October, W. A. Bailey and Wheeler. & Jones were called upon to pay their subscriptions, $12,000 was loaned to each of these parties to meet their obligations. The security was shipbuilding bonds.

Through an investigation conducted by some of the directors in late September, all these facts were revealed

Upon a reorganization of the shipbuilding company, the details of which need not be stated, the bonds held as collateral by the trust company were worth but $176 each. The loans to White & Company, E. G. Brackman, A. Caldwell, C. E. Reiss, August 11th, G. M. Thurlow, August 11th, A. H. Engel, August 11th, W. A. Bailey and Wheeler & Jones were almost a complete loss.

We do not say as matter .of law that the defendant Gould was negligent or that his negligence caused the above losses, but we do say that it is a question of fact whether, as a director, he should have known, by the July 22d meeting, something of the company’s affairs and the transactions and methods of its president, and whether, upon the evidence and under the conditions above stated, he should have, in the exercise of reasonable care, done something to prevent the continuance of such methods and further loans on shipbuilding bonds without a check or supervision. It is also a question of fact whether the above losses may not be attributed to such inattention. (People v. Equitable Life Assurance Society of U. S., 124 App. Div. 714 , 731.)

On September 25th the president took $35,000 in cash from the company. This was without authority. That the president at such a time in the company’s affairs could take such a large sum of money for his own purposes without procuring the authority or direction of the executive committee or the board of directors or the consent.of any other officer, in the opinion of some of my associates, classes this loss with those above mentioned. That is, a similar question is presented as to whether or not a reasonable attention to the affairs

The defendant Gould testified that he never went near the trust company, knew nothing of its affairs, gave no attention to its business, took no action except to resign. There is, therefore, evidence of his neglect, and evidence that his neglect may have resulted in the losses specified, which required the trial court to determine these matters. As the case now comes before us, there have been no findings whatever upon these cardinal issues of the case. The questions litigated upon the trial were two, the defendant’s neglect and the losses attributable thereto. In making his decision, the trial judge found the facts of the transactions but failed to make any finding upon these two questions. There is no finding of neglect, neither is there a finding that there was no neglect; likewise, there is no finding that the losses were not due to Mr. Gould’s neglect. It is true that the trial court refused a request to find that Gould was negligent and that losses resulted therefrom, but this is not a finding that he was not negligent or that losses did not result therefrom.

A refusal to find a fact requested is not equivalent to an affirmative finding to the contrary, and the failure of the trial court to find upon the issue- raised by the pleadings and evidence given upon the trial is a mistrial. A judgment must be based upon facts found, not facts refused. (Morehouse v. Brooklyn H. R. R. Co., 185 N. Y. 520 ; Dougherty v. Lion Fire Ins. Co., 183 N. Y. 302 ; Alcock v. Davitt, 179 N. Y. 9 .)

In conclusion, therefore, we state that there was evidence in this case from which a finding might be made of Gould’s neglect, and that losses were attributable thereto. These matters not having been passed upon by the trial judge, there has been a mistrial which requires a reversal and a rehearing.

Hiscock, Ch. J., Chase, Collin, Cuddeback, HoGan and McLaughlin, JJ., concur.

Judgment- reversed, etc.