Bates v. Dresser

Facts

BATES V. DRESSER

251 U.S. 524, 40 S.ct.247, 64 L.Ed. 388 (1920)

NATURE OF THE CASE: This was a bill in equity brought by the receiver of a national bank to charge its former president and directors with the loss of a great part of its assets through the theft of an employee of the bank while they were in power. 

FACTS: The bank was small, with capital of $100,000. It had a cashier, a bookkeeper, a teller, and a messenger. Before and during the time of the losses, Dressers (D) was its president and executive officer, a large stockholder, with an inactive deposit of from $35,000 to $50,000. Coleman (who created the problem) entered the service of the bank as a messenger in September 1903. In January 1904, he was appointed to be a bookkeeper, being then not quite 18 but having studied bookkeeping. In August, it was evident that the daily balance book was behind and Coleman was in charge of getting it up to date. In 1904 and 1905 there were some small shortages in the accounts of three successive tellers that were not accounted for, and the last of them was asked to resign. Before doing so, he told D that someone had taken the money and he can catch that person if allowed to stay. However, D refused. From the resignation, Coleman acted as a paying and receiving teller, in addition to his other duties. From his resignation, there was no money missing. In May 1906, Coleman took $2,000 from the vault but replaced it the next morning. In November, the same year, he began the thefts that are in question. He ceased to have charge of the vault in November 1907, and he invented another way of stealing. Having a small account in the bank, he would draw checks for the amount he wanted, exchanged checks with a Boston broker, get cash for the broker's check, and, when his check came to the bank through the clearinghouse, he would extract it from the envelope, enter the others in his books and conceal the difference by a charge to some other account for a false addition in the column of drafts or deposits in the depositors' ledger. He handed the cashier only the slip from the clearinghouse that showed the totals. The cashier paid whatever appeared to be due, and thus Coleman's checks were honored. As far as he thought necessary, in view of the absolute trust in him on the part of all concerned, he took care that his balance should agree with those in the cashier's book. By May 1, 1907, he had extracted $17,000. By November, the amount taken increased to $30,100 and the charge on D's account was $20,000. The amounts began to increase reaching a total of $310,143.02 when the bank closed on February 21, 1910. As a result of this, the amount of the monthly deposits seemed to decline noticeably, and the directors considered the matter but concluded that the falling off was due in part to the springing up of rivals. Wholesale deposits were increasing but was paralleled by a similar decreasing. Semiannual examinations by national bank examiners did not discover anything wrong. If cashier had examined the ledger or carefully studied the numbers, the fraud could have been discovered. The case was sent to a master who found for Ds. District Court entered a decree against all of them. The Circuit Court of Appeals reversed this decree, dismissed the bill as against all except the administrator Dresser, the president, and cut down the amount with which he was charged and refused to add interest from the date of the decree of the District Court. Dresser's administrator and the receiver both appealed the latter contending that the decree of the District Court should be affirmed with interest and costs. 

ISSUES: Would a bank director be liable for neglect of his duty if he accepted the cashier's statement of liabilities and failed to inspect the depositors' ledger? 

RULE OF LAW: A bank director would not be liable for neglect of his duty if he accepted the cashier's statement of liabilities and failed to inspect the depositors' ledger. It is a fundamental principle of corporate law that the fiduciary duties of care, good faith, and loyalty apply to both corporate directors and officers.

HOLDING AND DECISION: Would a bank director be liable for neglect of his duty if he accepted the cashier's statement of liabilities and failed to inspect the depositors' ledger? NO. A bylaw of the bank established the director' standard of conduct. They were to appoint a committee every six months to examine the affairs of the bank. Of course liabilities, as well as assets, must be known to know the condition, and as this case shows, they may be concealed as well by a false understatement of liabilities and by a false show of assets. We are not prepared to reverse the finding of the master and the Circuit Court of Appeals that the directors should not be held answerable for taking the cashier's statement of liabilities to be as correct as the statement of assets always was. If he had not been negligent without their knowledge it would have been, Their confidence seems warranted by the semiannual examinations by the government examiner and they were encouraged in their belief that all was well by the president, whose responsibilities, as executive officer, a large stockholder and depositor, and knowledge that his long daily presence in the bank was greater than theirs. They were not bound by virtue of the office gratuitously assumed by them to call in the passbooks and compare them with the ledger, and until the event showed the possibility, they hardly could have seen that their failure to look at the ledger opened a way to fraud. We are not laying down general principles, however, but confine our decision to the circumstances of the particular case. The position of the president is different. He had hints and warnings in addition to those mentioned like to include the auditor's report of 1903, the unexplained shortages, the suggestion of the teller, and the rapid decline in deposits. These would have induced scrutiny but for an invincible repose upon the status quo. However, little the warnings may have pointed to the specific facts, had they been accepted they would have led to an examination of the depositor's ledger, a discovery of past and a prevention of future thefts. We do not perceive any ground for applying to this case the limitations of liability ex contractu. In accepting the presidency, D must be taken to have contemplated responsibility for losses to the bank, whatever they were, if chargeable to his fault. We accept with hesitation the date of December 1, 1908, as the beginning of D's liability. Decree modified by charging the estate of D with interest from February 1, 1916, to June 1, 1918, upon the sum found to be due, and affirmed. 

Dissent: (McKenna and Pitney) We dissent because the other directors ought to be held liable to the extent to which they were held by the District Court. 

LEGAL ANALYSIS: It is a fundamental principle of corporate law that the fiduciary duties of care, good faith, and loyalty apply to both corporate directors and officers. See, e.g., Bates v. Dresser, 251 U.S. 524, 531, 40 S.Ct. 247, 250, 64 L.Ed. 388 (1920) (holding a bank president liable for losses incurred under his watch, reasoning that: “[i]n accepting the presidency Dresser must be taken to have contemplated responsibility for losses to the bank, whatever they were, if chargeable to his fault. Those that happened were chargeable to his fault after he had warnings that should have led to steps that would have made fraud impossible, even though the precise form that the fraud would take hardly could have been foreseen.”).

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