Full opinion text
KNOX, District Judge. This case is before me upon exceptions filed to the findings and conclusions of the Special Master herein. The suit is of major importance. The record consists of more than 8,000 pages of testimony, and this is supplemented by hundreds of exhibits. The Master’s opinion and report occupy 331 printed pages. The exceptions thereto are supported by many briefs of excessive length, with the result that they have tended to confuse rather than clarify the exceedingly intricate questions that are here involved. Much as I dislike to increase the length of the record, there seems to be no escape from the necessity of writing a detailed opinion, and so I begin. Defendant Penney is a highly successful, and nationally known business man. During the halcyon days of real estate speculation in Florida, he became deeply interested in land developments in and about the City of Miami. He became a citizen of Florida, and was there when the heavily charged bomb of actuality fell upon the inflated real estate market of that community, spreading ruin- and financial disaster throughout the state. As everyone knows, banks toppled, values shrunk, building ceased, and the City of Miami, from a business standpoint, was all but prostrate. Under these circumstances, many Floridians, along with others, lent their aid in clearing away the debris of the financial hurricane, and in salvaging such property and monetary values as remained. Among these, James C. Penney came to play a leading role. The City National Bank and Trust Company was tottering dangerously, and Penney went to its rescue. In the course of the effort then put forth, the City National Bank in Miami came into existence. That institution was organized upon December 23, 1927. Its history and background were these: At the start of business, the bank had a capital of $500,000, and a surplus of like amount. These sums had been supplied by a syndicate composed of three individuals and one corporation. The members, as specified below, subscribed the sums of money set opposite their respective names: J. C. Penney-Gwinn Corporation, . $500,000. W. R. Comfort 200,000. C. M. Keys 200,000. Charles L. Briggs 100,000, The City 'National Bank and Trust Company had been organized in October, 1925, and on the 6th of January, 1926, it was authorized to begin business. In May of that year, its name was changed to the City National Bank and Trust Company of Miami. Its president was Clark B. Davis. The institution had hardly gotten under way when Miami Bank and Trust Company and Commercial Bank, and Trust Company failed. Many of the assets, among them a considerable number of uncertain and doubtful quality, were acquired by the new bank. In acquiring these securities and other paper, the City National Bank and Trust Company of Miami received certain guarantees from First National Bank of Miami, and from the Bank of Bay Biscayne. A publicly subscribed fund furnished some further assurance of indemnity. In the end, however, all this was inadequate for the proper protection of the new bank. Finally, a situation developed that, upon March 19, 1927, the institution was put to the necessity of borrowing $5,000,000. This was accomplished through the medium of a trust agreement wherein First Trust and Savings Bank was named as trustee. The needed funds were supplied by a number of New York and Florida Banks. The Federal Reserve Bank of Atlanta was likewise a lender. Thereafter, this loan and the collateral securing the same, became known as the “pool loan.” Under the trust agreement, the Trustee was vested with powers of wide import. Among them was the right to apply the proceeds of any collection or realization upon collateral towards the reduction of the loan. By the time that the City National Bank in Miami came into being, the amount unpaid upon the pool loan was $3,550,000. J. C. Penney-Gwinn Corporation, referred to hereafter as Penney-Gwinn, was organized under the laws of Florida. It had been formed to take over certain interests and holdings owned by J. C. Penney and by Ralph W. Gwinn. The latter is a New York lawyer, and a member of the firm of Gwinn & Pell. This firm handled most, if not all, of the legal work of both J. C. Penney and Penney-Gwinn Corporation. It is of counsel to Penney in this litigation. Penney-Gwinn was owned respectively by Penney and Gwinn in the proportion of 10/llth and 1/llth. Penney-Gwinn and Penney were represented in Florida by a man named Richardson Saunders, and Penney had become interested in Florida banking at the instance of W. R. Comfort who then was a stockholder of the City National Bank and Trust Company of Miami. Penney decided upon the venture after having received a report which he had delegated Gwinn and Saunders to prepare and submit to him. Subsequently, the aforementioned syndicate was formed and began to function. In the first instance it was contemplated that the syndicate funds would be applied to the reduction of the pool loan. In return therefor, the syndicate, in addition to interest upon its money, was to have certain bonus shares of stock in the City National Bank and Trust Company of Miami, to be contributed by its old stockholders. This plan did not eventuate. Decision was made to found City National Bank in Miami, and the syndicate money was applied to constitute in equal amounts the capital and surplus of the institution. The stated capital funds of the City National Bank and Trust Company of Miami then stood at $2,000,000. Its surplus was listed at $500,000. Upon February 10, 1928, that bank charged off its assets to the extent of $1,500,000. Thereupon, under an agreement dated January 3, 1928, the two banks were united under the name of City National Bank in Miami. Stockholders in City National Bank & Trust Company exchanged their stock in the new bank upon the basis of four shares for one. By this arrangement, and the contribution of the syndicate, the new bank, which issued 10,000 shares of its capital stock, each of the par value of $100, acquired a capital of $1,000,000, and a surplus of the same sum. The stockholders of the older bank provided a bonus that was the equivalent of 298 shares of the new organization. This contribution, after the deduction of some legal fees, came into the possession of the syndicate members, Penney-Gwinn’s share being 122 shares. That corporation had also purchased the equivalent of 405 shares from the stockholders of the older bank. The shares acquired in the manner stated above, together with other stockholdings of the syndicate members, gave them a majority of the stock of City National Bank in Miami, putting them in complete control of the institution. Penney-Gwinn became, and was recognized as, the dominating factor. Coincident with the beginning of the new bank, the pool loan agreement was modified. R. N. Denham became trustee in place of First Trust and Savings Bank, and provision was made for a change in interest rates. Proportionately to their respective ■contributions to the syndicate fund, the participants therein guaranteed the pool loan to the extent of $1,000,000. Thereupon, the entire capital and surplus funds of City National Bank in Miami were applied in reduction of the pool loan. Certain money and other liquid assets of the City National Bank and Trust Company were utilized to extinguish the debts owed to certain banks that had participated in the creation of the pool loan. This, nevertheless, was not so as respects the advances made by Irving Trust Company, Bankers Trust Company and the Federal Reserve Bank of Atlanta. When the new bank began doing business upon February 10, 1928, the pool loan had been reduced to $2,250,000, and by March 1, 1928, further payments had lessened it to $1,750,000. Payments on account thereof continued, and it was wiped out on June 26, 1929, by a final payment of $700,000. The procedure that had been followed was instrumental in requiring the new bank to borrow money frequently in order to continue business. Penney-Gwinn and others were the sources of supply. The motive of Penney-Gwinn in entering the banking field was to make money. This same motive, I have no doubt, also animated Penney. In addition, he may properly be credited, I think, with a desire to stabilize and improve general business conditions in Miami, and thus be helpful to his own Florida investments. At any rate, had the syndicate members not gone to the relief of the City National Bank and Trust Company, that bank would have had to close its doors. A report of a national bank-examiner, as of October 10, 1927, revealed it to be in an unhappy financial state, and this, probably, is what led Comfort and Davis to ask Penney to come to the rescue. Penney saw this report, and when he came into the field, he must have appreciated that the new bank was a sprawling financial infant, unable to stand alone, and completely stripped of the essential raiments of capital and surplus. This is an outstanding reason why, a man in his place, standing before the community as a prince of merchants and a person of great means, should not have lent the bank the use of his name and prestige, unless he was prepared fully to give its affairs his devoted attention and intelligent effort.. At his hands, it received neither. Through the large loans made to the bank by Penney-Gwinn and others, the institution struggled pitifully for about three years and then deserted by Penney, fell by the wayside. During its existence, the bank paid no dividends, and from all that appears, Penney and Penney-Gwinn were wholly without a profit from the bank. From conscious and deliberate fraud, each can properly be acquitted. Nevertheless, the record discloses a story of neglect, poor judgment and erroneous policy that are at once amazing and startling. Upon February 7, 1928, defendant was elected a Director, and Chairman of the Board of the new Bank. The following day he executed and delivered the statutory oath of office which was, that he would “* * * so far as the duty devolves on him, diligently and honestly administer the affairs of such association, and [would] not knowingly violate or willingly permit to be violated any of the provisions of this title, and that he is the owner in good faith, and in his own right, of the number of shares of stock required by this title, subscribed by him, or standing in his name on the books of the association, and that the same is not hypothecated, or in any way pledged, as security for any loan or debt.” U.S.C.A. Title 12, Section 73. He was reelected to the above mentioned positions in January of both 1929 and 1930. On each occasion he again assumed the obligations of his oath of office. Recapitalizations. During the existence of City National Bank in Miami, it underwent two recapitalizations. The first one was this: Assets in the amount of $1,000,000 were written off on February 20, 1929. This resulted in the reduction of the bank’s capital and surplus to $500,000 each. Par value of the bank’s 10,000 shares of stock was reduced from $100 to $25 each, the stockholders receiving two shares for each share previously held. The syndicate members then underwrote a new issue of 20,000 shares, and these were offered to stockholders at $50 per unit. In this fashion, funds of $1,000,-000 were raised to make good the written-off assets. The bank’s capital and surplus were thus restored to $1,000,000 each. In bringing about this recapitalization, Penney-Gwinn acquired additional stock to the extent of $492,662.50. Notwithstanding the infusion of new money, the bank failed to prosper, and a national bank examiner’s report of December 6, 1929, showed an estimated loss of $1,020,651.82. Of the remaining assets, $1,-422,241.91 were rated as doubtful and $3,611,281.92 as slow. Thereupon the Comptroller of the Currency, in order to protect the situation, demanded that the loss estimated by the examiner be written off, and expressed his intention of levying an assessment of 100% against the bank’s stockholders. This, of course, was not pleasing to the bank directorate. An alternative plan of raising money was suggested and adopted. It was this. On April 4, 1930, assets having a face value of $2,000,000 were stricken from the balance sheet, reducing capital and surplus funds to $500,000 each. This was done through the surrender by each stockholder of one-half of his holdings. About coincident with these changes, and at the instance of the bank’s directorate, the Tarrier Company of Delaware was organized. It had authority to issue preferred stock in the amount of $1,000,000 par value, and 100 shares of no par common stock. The preferred stock, carrying voting control, was purchased by the bank’s leading stockholders, at a cost of $1,000,000. Following this, the bank, in return for a million dollars in cash, and its acquisition of Tarrier Company’s common stock, delivered to Tarrier such bank assets as had theretofore been charged off, or which were regarded as doubtful. The face value of these assets exceeded $6,300,000. As can readily be imagined, when these expedients were first proposed, they were matters of concern to the bank’s shareholders. Many of them inquired the reason for doing what was suggested. In order to explain matters, Gordon, president of the bank, prepared and sent a mimeographed letter to each stockholder. He stated that the assets considered most worthless were to be the subject of transfer. In a personal interview, he characterized them as “bad, worthless paper” or “the worst assets we had.” At a special meeting of stockholders, called to approve the proposal, Gordon submitted a report to the assembled group. It was there said that “questionable assets” would be charged off, and sold to the Tarrier Company. After hearing the report, the stockholders adopted resolutions whereby the whole plan might fully be executed. The day following, a letter, over the signature of defendant, was published in the Miami newspaper, in which he said that $2,000,000 of bad and questionable assets had been charged off the balance sheet. Thereafter, it appears, some of the items transferred to the Tarrier Company consisted of certain cashier’s checks, and the guaranty of a solvent bank. Upon such items, the Tarrier Company realized $110,783.14. The bona fides and honesty of the Tarrier transaction, along with a number of others, are here under violent attack, and further on, more will be said about them. • Throughout the greater part of 1930, the bank remained open and carried on business. However, on December 20, of that year, the doors were closed, never to reopen. jThe Comptroller of the Currency, on December 23, 1930, announced its insolvency and appointed H. J. Spurway as Receiver. On April 10, 1934, Spurway resigned, and was succeeded by C. H. Bancroft. He died, and R. C. Parsons was substituted. At the time of closing, some 5,700 depositors were owed $5,996,970.02. They have had a return of forty percent by way of liquidating dividends, and irrespective of the outcome of this suit, will have some further return. At this point, a moment’s consideration should be given to the character of the management and supervision of the bank’s activities, upon the part of its officers and directors. As the name Penney-Gwinn suggests, it is within the control of Messrs. Penney and Gwinn. It was utilized in handling real estate transactions, in which these men were interested. For the purposes of the business, Penney contributed assets of $11,-000,000 to the corporation, and Gwinn $1,227,000. One Florida land development handled by the corporation comprised 120,-000 acres and another 27,000. The company had also loaned $900,000 to a land venture known as Miami Shores, located on the waters of Biscayne Bay. In order to keep in touch with the business having to do with this development, Penney and Gwinn, as previously indicated, selected Richardson E. Saunders as their representative. Saunders was also associated with the Farm and Town Realty Corporation, wholly owned by J. C. Penney-Gwinn Corporation, and one or more of its other enterprises. After the organization of City National Bank in Miami, Saunders became one of its directors and Vice Chairman of the Board. In order that Saunders and Lewis, together with certain other persons, might appear to be qualified to act as directors, Penney-Gwinn Corporation transferred qualifying shares into their names, and in return, such persons, with one or two possible exceptions, gave to the corporation a non-interest bearing note which bore a statement as follows: “The maker reserves the right to deliver in payment of the note the equivalent number of shares of City National Bank in Miami at its then par value.” Following failure of the bank, PenneyGwinn paid the assessments levied by the Comptroller upon the holdings» of nine directors. This, together with the other facts recited, is persuasive evidence that none of these directors held stock of the bank in his own right. Although living and practising law in New York, Gwinn kept in close touch with the affairs of the bank. When it needed cash, as frequently was the case, PenneyGwinn activated by Gwinn, supplied the funds. Of the J. C. Penney-Gwinn Corporation, Penney was President, and Gwinn First Vice President. The latter had his office in the Company’s office building in New York. He appears to have passed upon all matters having to do with the advances of money to Penney-Gwinn’s various enterprises. He also took part in the selection of the bank’s personnel, and exercised considerable general supervision over loans and the activities of the companies in which he and Penney were interested. Another vice president and director of Penney-Gwinn was Burdette G. Lewis. He spent the greater part of his time in Florida looking after the affairs of Foremost Dairies, another Penney-Gwinn business. In order to make certain, I assume, that self-interest of bank directors, and their unwillingness to jeopardize their own investments, would tend to make them alert and attentive to their duties, and thus enhance the safety of depositors, Congress has declared that (U.S.C.A. Title 12, Section 73): “Each director, when appointed or elected, shall take an oath * * * that he is the owner in good faith, and in his own right, of the number of shares of stock required by this title, subscribed by him, or standing in his name on the books of the association, and that the same is not hypothecated, or in any way pledged, as security for any loan or debt.” Section 72 of Title 12 of the U.S.C.A. provides that “Every director must own in his own right shares of the capital stock of the association of which he is a director the aggregate par value of which shall not be less than $1,000. * * * Any director who ceases to be the owner of the required number of shares of the stock, or who becomes in any other manner disqualified, shall thereby vacate his place.” If my assumption as to the purpose behind these laws is correct, a half eye can see that Penney and some of his associates did all they could to frustrate the will of the national legislature. In the absence of the restraint of self-interest and personal well being, it is extremely easy for persons who are entrusted with the custody and investment of other people’s money to be free and easy in making choice of securities into which it is to go. Whatever may have been the honesty of intention of the directors of this ill-fated bank, their slogan seems to have been “Miami real estate values must be preserved and we shall do it.” At any rate, they gave approval to numerous loans which, if they were not corrupt, approached the point of asininity. Considering the manner in which some of the directors deliberately, and again and again, flouted statutes designed for the protection of national bank deposits, it would not be difficult, upon slightly more evidence than is here, to draw an inference of downright dishonesty. I am glad to say that the testimony hardly justifies that finding, and it will not be made. At the same time, Penney’s actions and those of his legally unqualified dummy directors must be condemned as having breached numerous provisions of the National Bank Act. Each and every act in which any one of them participated, and in which loss resulted to the bank, in my opinion, should be held to have been vitiated by their unlawful conduct. As was said in Kavanaugh v. Gould, 147 App.Div. 281, 131 N.Y.S. 1059, 1064, a case cited by defendant: “ * * * The law has no place for dummy directors. They are bound generally to use every effort that a prudent business man would use in supervising his own affairs, with the right, however, ordinarily to rely upon the vigilance of the executive committee to ascertain and report any irregularity or improvident acts in its management.” One or more of Penney’s dummies were upon the Executive Committee, and it failed signally to discharge its duties. The ideas that have just been stated, with respect to the liabilities that attach themselves to the wrongful actions of unqualified persons who assume to act as directors of national banking associations, were first expressed in an oral opinion herein, which was delivered upon February 5, 1941. In the course thereof, counsel were authorized to submit findings of fact and conclusions of law along the lines of such decision. On April 18, 1941, the prevailing parties served Penney’s counsel with a copy of their proposed findings and conclusions, and with notice of settlement thereof, returnable April 28, 1941. The attorneys for Penney were given until May 23, 1941, to serve and file criticisms of and objections to the proposals of the other side. Without obtaining leave of Court, counsel for Penney, on May 19, 1941, served and filed a “Memorandum on Behalf of James C. Penney, in Respect of Liability Arising out of Alleged Defective Qualification of Certain Directors.” This “memorandum” is attacked as an “unauthorized re-argument of the case upon the merits.” Ordinarily, this objection would be well taken. But, for reasons that presently will appear, my view of the law, as set forth in the oral opinion of February 5, will be somewhat amplified. Consideration will also be given to the merits of some other points raised by defendant. The duties and liabilities of directors of national banks are of two kinds (1) those imposed by the National Bank Act, the charter and by-laws of the bank; and (2) common-law responsibilities, arising concurrently from the fiduciary relationship of the directors to the bank’s stockholders, depositors and creditors. Gallin v. National City Bank, 152 Misc. 679, 273 N.Y.S. 87, O’Connor, The Law of National Banking 1941, paragraph 4505. Directors of a national banking association are not relieved from their common-law duty to be honest and diligent by anything contained in the National Bank Act. As the Supreme Court has pointed out, this is shown by the oath in which such directors swear that they will “diligently and honestly administer the affairs of the association” and will not “knowingly violate or willingly permit the violation of any of the provisions” of the statute. Bowerman v. Hamner, 250 U.S. 504, 39 S.Ct. 549, 550, 63 L.Ed. 1113. Similarly, the National Bank Act in no wise impairs the common-law liability of directors in the event that they fail diligently and honestly to discharge their trusts. Bowerman v. Hamner, supra; O’Connor, op.cit., paragraph 4510. The opinion of February 5 clearly states defendant’s responsibility under both of these sources of liability. It also called attention to a “much broader basis” for decision, viz., violation of Section 72 of the National Bank Act, which prescribes the qualifications of directors of national banking associations. It is this “broader basis” of my decision that defendant now assails as a “novel theory of law.” On this branch of the case, the gist of the argument, as stated upon Penney’s behalf, is this: “Assuming, for argument’s sake, that these persons were unqualified, no civil liability attached to the unqualified directors merely because of some defect in their qualification. The only civil liability is that imposed by Section 93 of the banking act, and since no damage was sustained in consequence of the mere defective qualification, no liability was imposed by that section. In any event, the unqualified persons were de facto directors, and, as such, subject to the same liabilities as de jure directors and no more. * * * The requirement that directors of a national bank shall own, in their own right, $1,000 in par value of its stock is entirely statutory. There is no requirement at common law that a director be a ‘stockholder’. * * * Section 93 * * * imposes liability only ‘for all damages which * * * shall have been sustained in consequence of such violation’ * * *. None of the losses were ‘sustained in consequence of such violation’ * * *. There is no common law tort toward the bank arising out of the mere fact of a defect in qualification. * * * The requirement that directors should have stock of the par value of $1,000 is largely an anachronism. It dates back to a time when banks were small. * * * Looking at the realities, the requirement of such an investment was purely technical. * * * Section 72 of the Banking Law merely requires that ‘any director who ceases to be an owner of the required number of shares * * * shall thereby vacate his place.’ This Section does not impose any liabilities for continuing to act notwithstanding cessation of qualification. All that the Banking Law imposes by way of civil liability for breach of this and other statutory requirements is set forth in Section 93. * * * It is, of course, clear that * * * the persons in question could not properly take the oath required by Section 73 of the Banking Act * * * because the section as to an oath required them to swear that their stock was not hypothecated, or in any way pledged, as security for any loan or debt. When the person in question took the oath, in view of the circumstance that their stock was pledged as collateral for the purchase money loan, they made a false oath. As such they might be subject to the criminal liabilities attaching to a false oath and they were also subject to the civil liabilities imposed by Section 93 of the Banking Act for losses that were sustained ‘in consequence’ of the falsity of the oath, if there were any losses of that kind. But in the meantime they were fully qualified directors.” In this connection, it must be recalled that the last sentence of Section 72 of the National Bank Act reads: “Any director who ceases to be the owner of the required number of shares of the stock, or who becomes in any other manner disqualified, shall thereby vacate his place.” Defendant’s argument, in substance, is that the statute is of the type known to the Roman law as a “lex imperfecta,” in that it neither declares the act in violation of the statute to be invalid nor provides that a penalty follows. Ulpianus, Regularum liber singularis, Pr. 1, 2. There would be more weight to the argument if the statute merely said that a director “shall vacate” his office. Had this phraseology been used, it might possibly be interpreted as constituting a command that the unqualified director should forthwith cease to act as a director, and that his previous acts, done in good faith and with reasonable judgment, would not be open to attack. But, in this respect, the statute is not so lame as defendant would have me think. The law, by mandatory words, specifically declares that upon the disqualification of any director, he “shall thereby vacate his place.” And this, I assume, means “instanter.” The effect of the word “thereby” is to work an automatic and complete forfeiture of-authority to do anything upon behalf of the bank. In and of itself, the statute, in essence, has' declared that an unqualified director is nothing more nor less than an interloper. Little, if any, room is left for a discussion of the authority of “de facto” “directors.” All that remains for consideration is the claimed validity of the rights and privileges of interlopers, intermeddlers and usurpers. There was no talk of “de facto” “executors” in Glascock v. Gray, 1908, 148 N.C. 346, 62 S.E. 433, 434. In that case a statute of North Carolina provided that “No foreign executor has any authority to intermeddle with the estate until he shall have been entered into bond” (Revisal N.C. 1905, § 28), within a year from the testator’s death. The ruling was that deeds made by foreign executors, who had never qualified in North Carolina, to lands in that State, under a testamentary power to sell, conveyed no title until the statutory requirements had been complied with. The Court cited Scott v. Blades Lumber Co., 1907, 144 N.C. 44, 45, 56 S.E. 548, where it was said that “a deed to real property made by foreign executors by virtue of authority in the will is void in this state unless the executors qualify here.” Furthermore, the distinction between “an officer de facto” and “a mere usurper” is not unfamiliar to the common law. Matter of Ringler & Co., 1912, 204 N.Y. 30, 97 N.E. 593, 598, Ann.Cas.1913C, 1036 and cases therein cited; 2 Fletcher Corp., 69 (1931). From the argument made upon behalf of Penney, it appears that he is now driven to Section 93 of the Bank Act in an attempt to avoid, or minimize, his civil liability. To this end, he is willing, apparently, to charge certain of his chosen “directors” with having criminally made false oaths in violation of Section 73. To the same end, he is also prepared to belittle the Congressional policy having to do with the qualifications to be possessed by directors of national banks. He concedes “there are statutes in substantially every state making stock ownership a condition precedent to qualification for a directorship in state banks, or business corporations.” As respects national banks, he must also admit that the matter is minutely regulated by Congressional enactment. Section 72 of the National Bank Act, as previously pointed out, provides that “Every director must own in his own right shares of the capital stock of the association of which he is a director the aggregate par value of which shall not be less than $1,000, unless the capital of the bank shall not exceed $25,000 in which case he must own in his own right shares of such capital stock the aggregate par value of which shall not be less than $500.” See, also, Public Utility Act of 1935 (Federal Power Act), Title II, Part III, Section 305, 49 Stat. 856, Title 16 U.S.C.A. § 825d; Public Utility Holding Company Act of 1935, Title I, Section 17(c), 49 Stat. 831, Title 15 U.S.C.A. § 79q (c). As for the personal liability of directors of member banks, see Title 12 U.S.C.A. § 503, Federal Reserve Act, Section 22(f). Section 71a of the National Bank Act, specifying the qualifications of the board of directors or other similar governing body of every national banking association and of every State bank or trust company which is a member of the Federal Reserve System, was not enacted until 1933. This section at that time required that “every director, trustee, or other member of such governing body shall be the bona fide owner in his own right of shares of stock of such banking association, State bank or trust company having a par value in the aggregate of not less than $2,500, unless the capital of the bank shall not exceed $50,000, in which case he must own in his own right shares having a par value in the aggregate of not less than $1,500, or unless the capital of the bank shall not exceed $25,000, in which case he must own in his own right shares having a par value in the aggregate of not less than $1,000.” So much of this section as related to stock ownership by directors, trustees or members of similar governing bodies of member banks of the Federal Reserve System was repealed by Act of June 16, 1934, C. 546, Section 4, 48 Stat. 971, 12 U.S.C.A. § 71a. So much of the section as related to stock ownership by directors, trustees, or members of similar governing bodies of any national banking association or of any State bank or trust company which was a member of the Federal Reserve System, was repealed by Act of August 23, 1935, Chapter 614, Section 306, 49 Stat. 708. From all of the foregoing, it is certain that Congress has given close attention to the question of the stock holdings of bank directors. Defendant, taking an atomistic view both of the affairs of the bank and of the interpretation of the statute, insists that, under Section 93, there was no damage proximately resulting from the mere defective qualification per se of his dummies, and that, therefore, neither they nor himself is under civil liability to the depositors. The opinion of February 5 stresses that Section 72, in effect, obviates the impractical, if not impossible task of allocating liability, and of apportioning damages, according to a standard of causation, allegedly required by a literal application of the narrow and restricted last phrase of Section 93. The structure of Section 72 implies all that it fails to specify. It states particularly the several requisites of eligibility to serve as a director of a national bank. These are that, every director must (1) during his whole term of service, be a citizen of the United States, and (2) at least three-fourths of the directors must have resided in the State, Territory or District in which the association is located, or (3) within fifty miles of the location of the office of the association, for at least one year immediately preceding their election, and (4) must be residents of such State or within a fifty-mile territory of the location of the association during their continuance in office. (5) Every director must own in his own right shares of the capital stock of the association of which he is a director of a certain prescribed par value. In this connection, it is important to note that the section makes no attempt, if such an attempt were thought at all feasible, to isolate the liabilities, or to calculate the damages proximately resulting from violations of one or more of the qualifications prescribed by the statute. The law will be satisfied with a much less sophisticated, and much more practical criterion of responsibility. The final sentence of the section broadly lays down the principle that for ceasing to be the owner of the required number of shares or for becoming “in any other manner disqualified” every director “shall thereby vacate his place.” The simple and inescapable fact is that, under the statute, the depositors had a right to have qualified directors in office. From this premise, it follows, according to elementary principles of the law of torts, that "where an act is, either inherently or because of the manner of performance, an unprivileged invasion of right, the absence of malice or the presence of a good motive does not render it any the less a tort; if the conduct is outside the zone of privilege, it is tortious regardless of motive.” 62 C.J. 1106. All this leads me to adhere to my previous declaration, that such sums as the unqualified “directors” lost, wasted and dissipated, are items for which recovery can here be had. Penney, as previously found, was party and privy to the wrongs committed by the “directors” and he must respond personally for such losses as came to the depositors through the unwarranted and unlawful acts of his chosen dummies. They acted, not only at their peril, but also at that of Penney. It was he, through Penney-Gwinn, who brought them into being. Penney, with certain exceptions noted in my findings of fact, is also liable for losses where there was a violation of the National Bank Act. Each of such violations as to which he is held to responsibility inflicted “damages * * * sustained in consequence of * * * violation” of the statute. To hold otherwise would subvert the purpose not only of the National Bank Act, which itself must be read as a whole, but also of other statutes in pari materia. “The liability of a director of a national bank is for the most part fixed by federal legislation.” 25 Georgetown Law Journal, 146 (1936). Attorney General (now Justice) Jackson recently called attention to the addition to the banking law of such statutes as the Reconstruction Finance Act, 15 U.S.C. A. § 601 et seq., the Federal Deposit Insurance Act, 12 U.S.C.A. § 264, “in addition to many recent amendments of the basic National Bank Act and the Federal Reserve Act.” Foreword to O’Connor, op. cit. The applicable Federal statutes are collected in Mr. O’Connor’s learned treatise, and there is no need to review them here in extenso. They clearly indicate the continuous Congressional judgment that certain legislative and administrative regulations are necessary in this field, as in so many others, adequately to safeguard the public interest. If the arguments made by Penney be sound, it would appear that Congress has shown an amazing solicitude for the wrongful and deliberate acts of persons who, being in control of other people’s money, have wasted that substance, as it were, in riotous living. Amazing, too, if defendant is correct, would be the fine disregard which Congress has shown for the just rights of outraged depositors. Defendant’s interpretation of the law is not in accord with recent judicial pronouncements. In United States v. Hutcheson, 312 U.S. 219, 61 S.Ct. 463, 85 L.Ed. 788, decided by the Supreme Court on February 3, 1941, the ruling was that certain conduct was protected from criminal prosecution under the Sherman Act, 15 U.S.C.A. §§ 1-7, 15 note, because of exemptions of the Clayton Act, 15 U.S.C.A. §§ 12-27, as re-defined in the Norris-LaGuardia Act, 29 U.S.C.A. § 101 et seq. The Court, per Frankfurter, J., said at page 235 of 312 U.S., at page 467 of 61 S.Ct.: “Such legislation must not be read in a spirit of mutilating narrowness. On matters far less vital and far less interrelated we have had occasion to point out the importance of giving ‘hospitable scope’ to Congressional purpose even when meticulous words are lacking. Keifer & Keifer v. Reconstruction Finance Corporation, 306 U.S. 381, 391, 59 S.Ct. 516, 519, 83 L.Ed. 784, and authorities there cited. The appropriate way to read legislation in a situation like the one before us, was indicated by Mr. Justice Holmes on circuit: ‘ * * * The Legislature has the power to decide what the policy of the law shall be, and .if it has intimated its will, however indirectly, that will should be recognized and obeyed. * * * It is not an adequate discharge of duty for courts to say: We see what you are driving at, but you have not said it, and therefore we shall go on as before.’ Johnson v. United States, 1 Cir., 163 F. 30, 32, 18 L.R.A., N.S., 1194.” In Van Beeck v. Sabine Towing Company, 1937, 300 U.S. 342, at page 351, 57 S.Ct. 452, at page 456, 81 L.Ed. 685, the Supreme Court, in a unanimous opinion, per Cardozo, J., wrote: “There are times when uncertain words are to be wrought into consistency and unity with a legislative policy which is itself a source of law, a new generative impulse transmitted to the legal system.” Defendant places much reliance upon the English case of In re Canadian Land Reclaiming and Colonizing Company, 1880, 14 Ch.Div. 660. In this case C. and D. were appointed, and for some time acted, as directors of a land company, the articles of which made the holding of 100 shares the qualification for a director. Neither of them held any shares. No allegation was made that either C. or D. had done or concurred in any act which would have made him liable for misfeasance if he had been a duly qualified director. The company was in course of being wound up. The liquidator applied under Section 165 of the Companies Act of 1862 to charge them for “misfeasance” in acting as directors without qualification. The application of this section was the only question in the case. The ruling of the Court of Appeal, reversing Jessel, M. R., was that the section created no new right, but merely provided a new summary remedy for calling directors to account for acts of impropriety for which there would be at all events relief without the new procedure in the Courts of Law. In the argument before the Court of Appeal, counsel for the successful appellants C. and D., made two points, which, in my opinion, peculiarly support the view I have taken of defendant Penney’s liability. These were as follows: (1) “We do not dispute that if these gentlemen had wasted the moneys of the company, they would have been liable under this section.” (2) “The misfeasance of appointing these gentlemen directors without qualification was the act of the other directors, and the proceedings ought rather to be against them.” 14 Ch.Div. at 668, 669. It will thus be observed that Mr. Machen, in the sentence quoted by defendant from the author’s treatise on Corporations (1908), Volume 2, Section 1413, is merely generalizing the result reached in the above entitled English decision. In support of his generalization, the learned author cites this one case, and no other. His statement is “Where a person improperly acts as director without the required qualification, his conduct cannot be commended; but he does no actionable wrong to the company, for no damage can be proved to have been sustained by the corporation.” The author doubtless derived this conclusion from the fact that in the Canadian Land case, no act of misfeasance was alleged against either C. or D. for which either would have been liable had they been duly qualified directors. Doehler v. Lansdon, 1931, 135 Or. 687, 291 P. 392, 298 P. 200, merely illustrates the familiar doctrine that third persons contracting with a corporation are held not obligated to inquire whether its directors failed to take the required oath. Matter of Ringler & Company, 1912, 204 N.Y. 30, 97 N.E. 593, Ann.Cas.1913C, 1036, is cited in complainant’s reply to defendant’s memorandum. From the head-note in the State report of that case, the following may be quoted: “Where the by-laws of a corporation require a director to be 'the holder or owner of at least one share’ of its stock and it appears that stock has been transferred prior to an election for the sole purpose of qualifying the transferees as directors, but that these shares had been immediately assigned back to the true owner in blank, their election to the office of director is invalid. * * * The persons so elected were between themselves and the corporation never directors or trustees either in fact or in law. They became officers de facto onl/y as to the public and third persons dealing with the corporation, and when they elected other directors to fill vacancies the persons so elected acquired no more right or title to the office than those who assumed without power or authority to elect them.” It will thus be seen that the Court of Appeals of the State of New York regarded a by-law of a corporation as a matter of significant importance, notwithstanding that such by-law was capable of amendment or rescission at any time. In this connection, complainants propound the following question to their adversary: “Shall less weight be given by the Federal Courts to the requirements which the Congress of the United States has prescribed as the qualifications of a director of a National Banking Association ?” To this query, the answer, of course, is “No.” To this I may add that, in my judgment, this court is in duty bound to carry out the obvious intent and purpose of Congress that, in handling the money of national bank depositors, the unwarranted action of disqualified officials can neither be tolerated, condoned nor excused. If such directors lose or dissipate the funds which they have handled, they must respond to those whose money has been unlawfully handled, and lost. And, liability, as I have said, rests also upon the persons who connived, aided and abetted the unqualified directors by making it possible for them to engage in the unauthorized use of the money of the bank’s depositors. On reconsideration of the whole case, I am satisfied that what I have already said (on the subjects of “causal relation” and “statutory interpretation”) makes plain why, on the particular facts involved in Reserve Deficiency Losses Nos. 6 and 7 herein, I do not consider myself bound by Holman v. Cross, 6 Cir., 1935, 75 F.2d 909, or by Allen v. Luke, C.C.D.Mass.1908, 163 F. 1018, to the extent that they point to a contrary conclusion. Returning now to factual discussion, it may be said that throughout the life of the bank, Gwinn took part in the selection of directors, and it was at his suggestion and perhaps insistence, that Penney accepted the chairmanship of the Board. It was Gwinn, too, who helped bring about the promotion of Saunders to the vice presidency of the Board, at a salary of $7,500. At Gwinn’s direction, Saunders chose attorneys, from time to time, to represent the bank. Reports upon the bank’s condition, its profits, losses and commitments, went regularly to Gwinn. Other details of management were under his supervision and direction. As a result, he was at all times in a position to keep Penney advised of what was going on, and there can be little or no doubt that he did transmit much of his knowledge to him. During the time the bank was in operation, the directors held twenty-six regular and special meetings, of these, Penney attended three, two in 1928, and one in 1930. He was present, too, at a meeting of the Loan and Discount Committee iin 1930, when the advisability of extending aid to the Coral Gables Corporation was under discussion. In connection with the inattention of the Chairman of the Board to the affairs of the Bank, the Special Master’s report states the following: “Defendant Penney offers excuses for nonattendance at meetings which will not go. His wife suffered injury in a fall from a horse in Westchester the latter part of September, 1928 (presumably after the meeting of September 11th) which kept her in the hospital two weeks. Mrs. Penney was up and about before the meeting of October 26, 1928, however, and defendant Penney was off on his fall round of livestock fairs and store visits, having left White Plains for Memphis, Tennessee, on October 14th. “His own run down condition and Mrs. Penney’s health resulted in a trip around the world, leaving the middle of January, 1929, and returning a few days before May 28, 1929. A fainting spell two or three days after return resulted in a quiet summer at Kent, England, from which he did not return until September 27, 1929. It would, no doubt, be reasonable to excuse for such trips abroad a director who had been faithful in attendance at other times. Before the first of these trips in 1925 was taken, however, it must have been clear to defendant Penney that he should resign and insist that a substitute be selected who could be present and share the responsibility devolving on the board. “He suffered sinus trouble which did not prevent at least three long sea voyages during the period. He had tonsilitis and colds. No doubt some of the absences could properly be excused. In view of the fact, however, that defendant Penney’s infirmities did not prevent long trips to attend to business of the J. C. Penney Company and frequent attendance at the livestock fairs throughout the country in pursuance of his interest in breeding Guernsey cattle, the conclusion is inescapable that defendant Penney treated the bank’s business as of secondary consequence. “As a director he was thoroughly incompetent. His ignorance of the procedure of banks in general and of this bank in particular was abysmal, nor had he profited from his previous experience as a director of a bank in Salt Lake City. He had made no effort to prepare himself for the job. He was unfamiliar with the National Banking Act. He did not know how many vice presidents the Bank had, how it was organized by departments, whether it dealt in foreign exchange, who represented the bank in the management of the Clearing House Association, whether there was a regular independent audit of the bank’s books, what employees of the bank were bonded, what precautions there were against burglary and holdups, how many tellers the bank had or what were their functions, what forms of insurance the bank carried, whether the vault had a time-lock, or whether there was a separate savings or thrift department. He had forgotten, if he ever knew of, the City Trust Company, the bank’s trust affiliate, and had confused it with the Guardian Trust Company, organized to take over certain trusts in the Bank of Bay Biscayne. He did not know the difference in functions between a comptroller and a cashier. He did not know who had charge of the investment of surplus funds. He did not know what changes would be involved in setting up the women’s department that he advocated. “Defendant Penney may have considered that he was entitled to be relieved of the irksomeness of learning anything about this bank and the boredom of attending its meetings by reason of the financial contributions of Penney-Gwinn. These had been substantial. They included an original investment of $500,000; a contribution of $493,662.50 when the bank was recapitalized on February 20, 1929; a further contribution of $403,981.25 when Tarrier Company of Delaware was organized, and the assumption and payment of Tarrier’s note of $436,936.25.” After pointing out that, between March 1, 1928, and November 2, 1930, PenneyGwinn loaned the bank various sums of money amounting to $2,334,498.50, and that at the time of failure it had on deposit the sum of $485,500.87, the Master goes on to say: “In addition, Penney-Gwinn guaranteed a $350,000 certificate of deposit made by Irving Trust Company of June 4, 1929, which was later taken over by the Chemical Bank and remained unpaid when the bank failed. Penney-Gwinn guaranteed the payment of the pool loan (that had been made to relieve the distress of City National Bank & Trust Company of Miami) to the extent of $500,000. Again in June 1929 in order to enable the bank to substitute surety bonds for the government securities which it had pledged to secure public deposits, Penney-Gwinn gave its collateral guarantee to National Surety Company in the amount of $400,000, and later in the amount of $200,000. “A friend who could make such contributions and procure such results was, no doubt, of more value to the bank than one who merely contributed his judgment at directors’ meetings, particularly when that judgment was as uninformed as defendant Penney’s appears to have been. Nevertheless, the law requires that the board of directors exercise the corporate powers of the bank and give its affairs direction. When a director is called to account by the receiver or the depositors on behalf of the bank the Master has no choice but to pronounce negligent the unexcused failure to give attention to the bank’s business and to participate in its management.” By way of emphasis to the conclusion of the Master, I wish to add that, in my opinion, Penney’s conduct, so far described, was negligence of the grossest kind. Later on his wrongs to the depositors were magnified. On April 1, 1930 — about six weeks before the Bank of Biscayne failed, and just after the City National Bank in Miami had its transaction with Tarrier Corporation— the following statement, over Penney’s signature, appeared in the newspapers of Miami: “April 1, 1930. “To the Citizens of Miami: “In the early part of 1928, several of my associates and I acquired the majority of the stock of the City National Bank in Miami, believing that in so doing a great service could be rendered to the community. Our purpose was to help stabilize the banking situation in Miami. “About two years prior to 1928, the Bank had absorbed two local institutions — Miami Bank & Trust Company and Commercial Bank & Trust Company- — and as a result it sustained losses which were made more severe because of the hurricane and the collapse of real estate values in Miami. “It became necessary therefore to make good these losses and accordingly in 1928 and shortly thereafter we put into the Bank Two Million Dollars of new money and removed from its assets a like amount of bad paper. While this action on our part went a long way toward remedying the situation, we have found now after a searching examination and evaluation of the Bank’s receivables that it is advisable to still further rid it of questionable assets. “To carry into effect our decision to keep the Bank in a thoroughly sound condition, we have as of date of March 31, 1930, put into the Bank another One Million Dollars of new money and have at the same time reduced our capital funds by One Million Dollars, thereby charging off Two Million Dollars of bad and questionable assets. “So we now advise the public of the steps that we have taken, feeling that they, will appreciate this frank statement of facts. “As has been shown we have in the past three years sustained heavy losses but we have made good these losses and put the Bank in a strong and enviable position. “Our capital and surplus of One Million Dollars gives adequate funds with which to operate a bank with many times the total deposits that we now have. “It is our purpose to conduct the City National Bank of Miami along conservative lines. We have ample funds with which to meet the legitimate demands of business, and we stand ready to accord credits to any of our customers whose business is in such condition to warrant assistance. “I have the utmost confidence in the future of Miami and the whole of Southern Florida, and my associates and I have evidenced this faith by our investments in Miami. We have been squarely behind the City National Bank in Miami since we entered it three years ago. We have backed the Bank and Miami unreservedly in the past, and we shall continue to do so in the future. The City National Bank in Miami solicits the business of the people of this section. “I want to take this opportunity to thank our depositors for their patronage and to express the hope that they will join us in building a greater Miami. “(Signed) J. C. Penney “Chairman of the Board of Directors of City National Bank in Miami.” When the Bank of Bay Biscayne went to the wall, the following statement, with the acquiescence of Penney, was published: “1930 JUN 11 PM 12 56 “Hugh H. Gordon Jr, President— “City National Bank in Miami Miami FM— “I have just learned with regret of the situation that faces one of our friendly banking competitors an institution which has done so much for the upbuilding of Miami should their trouble cause any uneasiness in the minds of the depositors of the City National Bank in Miami of which I am chairman of the board of directors you are hereby authorized to reaffirm in my name my previous published statement that I am squarely back of the City National Bank and I suggest that you impress on our depositors the fact that ample funds are available to meet any demands that may be made upon us— “J. C. Penney.” In effect, the foregoing statements were unqualified representations to the bank’s depositors that Penney was guaranteeing the safety of their money, and that they were to have the benefit of the experience and judgment that had made him the head of a chain of 1500 successful stores. As to each of these representations, Penney’s default was utter and complete. Following the aforesaid public announcements, the bank carried on a campaign to increase its deposits, and to a degree, the results were good. But, as subsequently will appear, a large portion of these deposits was straightway paid to Penney to reimburse him for money that he advanced to stop the run on City National Bank in Miami at the time of the failure of the Bank of Bay Biscayne. At the time of argument I was told that when City National Bank in Miami closed its doors, Penney was financially unable to reopen them. As to his inability to do so, the record is silent, and I can, therefore, reach no conclusion upon the subject. But the excuse suggested, even if valid, falls short of being satisfactory. When he issued his statement, it was incumbent upon him to be positive that he could and would carry out his promises. The bank failed within a few months after he reassured the public as to its solvency, and so far as I know there was no occurrence of a cataclysmic nature in the meantime. But, asstuning that his financial condition had become impaired, he was, in view of what he had said, under the sacred obligation to give close attention to the affairs of the bank, and this he did not do. Instead of giving it solicitude and attention as great as that which a mother exhibits in the presence of danger to her first born, Penney neglected and then deserted the child of his financial loins. Unqualified directors were permitted to continue to play ducks and drakes with the money of depositors. So far as appears affirmatively, these men bore good reputations. Some had successfully engaged in business and a few had had some banking experience. One or more of them had large investments in the bank. But, though this is all true, the way in which they handled the bank’s funds amounted to downright profligacy. This is particularly apparent in the Rand transactions whereby thousands of dollars were figuratively thrown into the waters of Biscayne Bay. In giving consideration to the question as to whether Penney had subjected himself to liability under Section 93 of the National Bank Act, and Section 2 of the Federal Reserve Act, 12 U.S.C.A. § 501a, the Master concluded that, in order to hold him to account thereon, the proof should show that he had knowingly and intentionally participated in, or assented to, such violations of the Bank Act as are here alleged. Mere negligence, he thought, would be insufficient to charge him with violations which took place at directors meetings that he did not attend. In so holding, the Master placed reliance upon the decision in Yates v. Jones National Bank, 206 U.S. 158, 27 S.Ct. 638, 51 L.Ed. 1002. That ruling furnishes strong support for the Master’s position. Pie concedes, however, that there is some scope for variation from the doctrine in Thomas v. Taylor, 224 U.S. 73, 82, 32 S.Ct. 403, 405, 56 L.Ed. 673, where, Mr. Justice McKenna said: “There is ‘in effect’ an intentional violation of a statute when one deliberately refuses to examine that which it is his duty to examine.” That statement met with approval in Jones National Bank v. Yates, 240 U.S. 541, 36 S.Ct. 429, 60 L.Ed. 788, and again, in Corsicana National Bank v. Johnson, 251 U.S. 68, 40 S.Ct. 82, 64 L.Ed. 141. The Master believed that these decisions were insufficient to hold Penney, and after citing First National Bank of Fairbanks v. Noyes, 9 Cir., 257 F. 593, and Atherton v. Anderson, 6 Cir., 86 F.2d 518, concluded that proof of Penney’s knowledge of facts violative of the National Bank Act was a condition precedent to the fixation of liability upon him. Great as is my respect for the Master’s point of view, I feel, for reasons already stated, constrained to differ from it. Penney’s responsibility, under the circumstances here present, was quite as great as that to which a man was held in Thomas v. Taylor, supra. In that case, a bank director was held to liability for failing to make an examination to determine the true condition of an asset that had been characterized as doubtful by the Comptroller of the Currency, and which appeared on the bank’s statement of condition, as having its face value. In Jones National Bank v. Yates, supra, where, notwithstanding information of the Comptroller which called attention to discrepancies in th