Full opinion text
TUTTLE, District Judge. This is a suit in equity brought by the plaintiff, A. M. Anderson, as receiver, appointed by the Comptroller of the Currency under the National Banking Act, of the National Bank of Kentucky, an insolvent national bank, against directors of the said bank, to recover damages claimed by the plaintiff to have been sustained by such bank as a result of the alleged failure of the defendants to properly perform their duties as such directors. The defendants, some of whom are the legal representatives of deceased directors, as indicated, are John 8. Akers, Henry J. Angermeier, Peter L. Atherton, administrator of the estate of John M. Atherton, deceased, Dr. Oscar E. Bloch, Charles H. Bohmer, James B. Brown, R. Lee Callahan, Anthony J. Carroll, George M. Clark, Samuel W. Coons, William W. Crawford, Allen P. Dodd, Stuart E. Duncan, Joseph H. Durham, James Garnett, Angereau Gray, James J. Hayes, T. Kennedy Helm, Baylor 0. Hickman, Clarence G. Hieatt, Allen R. Hite, Charles F. Jones, Saunders P. Jones, Walter I. Kohn, S. Clay Lyons, Charles C. Mengel, Thomas J. Minary, Edward J. O’Brien, Jr., Henry D. Ormsby, Louisville Trust Company, executor of the estate of John B. Pirtle, deceased, Huston Quin, Richard S. Reynolds, Rosalie W. Rutledge, administratrix of the estate of Arthur M. Rutledge, deceased, William S. Speed, John Stites, Henry Yog’t, John H. Wilkes, Fidelity & Columbia Trust Company, ex-eeutor of the estate of Edwin M. Drummond, deceased, Louisville Trust Company, administrator of the estate of George L. Everbach, deceased, Churchill Humphrey, executor of the estate of Alexander P. Humphrey, deceased, Louisville Trust Company, executor of the estate of Milbum P. Kelley, deceased, Liberty Bank & Trust Company, administrator of the estate of Brainard Lemon, deceased, Louisville Trust Company, executor of the estate of William Short, deceased, Fidelity & Columbia Trust Company, receiver of said Louisville Trust Company, and the estate of Anthony V. Thompson, deceased. The cause was referred to a special master, who, after extensive hearings, at which more than one hundred witnesses testified, decided and reported, in a report of several hundred printed pages, that the defendants who were both officers and directors of the bank, namely, Brown, the president, Jones, the cashier (and, in 1930, a vice president), and Akers, Angermeier, Hayes, and Ormsby, vice presidents, were liable for damages in the aggregate sum of $6,476,992.92, and that certain of the defendants who were directors, but not officers, of such bank were liable in various sums, respectively, aggregating in amount $517,910; such directors being Carroll, Callahan, Speed, Vogt, Minary, Coons, Clark, Durham, Mengel, S. Jones, O’Brien, Hickman, and Duncan. To this report the plaintiff and the defendant nonoffieer directors, but not the officer directors, filed exceptions, and the cause is now before this court on such exceptions, on the record, consisting of about seven thousand printed pages and several hundred exhibits, and on exhaustive briefs and oral arguments. The plaintiff contends that the defendants are liable herein both by reason of their violation of various provisions of the National Banking Act, as hereinafter mentioned, and also because they failed'to exercise the reasonable care required by the common law of directors of a national bank, and thereby became guilty of negligence, and that such violation of the banking statutes and such negligence caused damages to this bank in a substantial amount. The statutory provisions involved will be mentioned and discussed in connection with the various transactions with respect to which such provisions are claimed to have been so violated. It is, of course, a well-settled general rule that, even in the absence of a statute to that effect, the directors of a national bank, as well as of any other bank, are bound to exercise, in the performance of their duties as such directors, reasonable* care, that is, the degree of care which a reasonably prudent director of such a bank would exercise in the performance of such duties, and that failure to exercise such care constitutes negligence, resulting in liability to such bank or its receiver for any damages caused by such negligence. Briggs v. Spaulding, 141 U. S. 132, 11 S. Ct. 924, 35 L. Ed. 662; Bowerman v. Hamner, 250 U. S. 504, 39 S. Ct. 549, 63 L. Ed. 1113; Bates v. Dresser, 251 U. S. 524, 40 S. Ct. 247, 64 L. Ed. 388. The question, however, as to whether, in a particular case, a bank director has used reasonable care, or, stated otherwise, whether such director has been guilty of negligence, is not always easy to determine, and in the present ease the determination of that question, with respect to the numerous defendants and in relation to the multitude, magnitude, and complexity of the facts and circumstances presented, is fraught with difficulty. Indeed, the size of the record and the number and extent of the transactions involved are such that a full and complete statement thereof would extend this opinion to undue length, and is unnecessary, and a concise summary of the material facts and of the legal conclusions applicable thereto will be sufficient. It may, however, be helpful to first point out certain general considerations governing the application, to this ease, of the various factors entering into the question of negligence in this connection. It must, of course, always be borne in mind that the burden of proof rests upon the plaintiff as to each defendant and as to each of the elements necessary to a recovery of damages by the plaintiff. For example, it cannot be presumed that any of the defendant directors acted.dishonestly or carelessly; that any of the loans made by this bank, were, when made, or afterwards became, improper; that, because such loans eventually resulted in loss to the bank, they were improvident at the time when they were made; that, because one or more of the officers of the bank were dishonest, other officers thereof also were dishonest; or that, because such an officer was dishonest, his associates knew of such dishonesty. As to these matters, as well as to all others involved herein, the plaintiff has the burden of proof. While elementary, yet, especially at this time when the sympathy of all is with the unfortunate depositors represented by the plaintiff receiver, these fundamental rules of law, as well as others to he now mentioned, seem to need restatement and emphasis, even at the risk of being considered as unnecessarily repeated platitudes. Nor can it he presumed that, merely because a loan was poor at the time when it was made, it follows that a reasonably prudent director would have discovered it. Such a banker, though constantly acting with reasonable care and caution, is almost inevitably bound to approve some loans which will prove to be uncollectible. So that, even if it be established by a fair preponderance of' the evidence that the indebtedness of a certain debtor to the bank on a particular loan was, in fact, when made, or thereafter became, a bad debt, which caused damage to the bank, yet before any defendant may be held liable therefor it must be proved that such defendant failed to perform a statutory duty or failed to act as a reasonably prudent director would have acted and that such failure was the cause of such damage. It must also be kept in mind that these acts and transactions are now being viewed in retrospect. It is easy to look back at the road which has been traveled and to see where the mistake was made in making the wrong turn and in leaving the highway which led to the proper destination. It is quite a different matter to place one’s self in the driver’s seat, on the dark night in the past and to determine whether or not a reasonably prudent driver would have then correctly read and interpreted the signposts along the way. I do not doubt that this very danger has led judges and jurors to decisions which worked an injustice to defendants. It is only to the extent that we can, and do, now view past acts in the light which was available at the time of such acts, that justice can be done, in accordance with law. It is so easy to look into the past, and it can be done so accurately, that those who write its records are called historians and axe highly respected. It is so difficult to foretell the future that one who attempts to do so is called a fortune teller and, if he charges compensation for his effort, is branded as a criminal. This analogy is more applicable to negligence as applied to loans and investments than to negligence which relates only to physical actions, such as the driving of an automobile. The worth of investments, such as the making of loans, is necessarily largely dependent on the future, and there are involved not only the changes arising from changes in general conditions throughout the country, but also the individual unforeseen misfortunes which come to the particular debtors and security in question. It is therefore highly important that in such a case as is presented here the court should make every possible effort to avoid the mistake of measuring the quality (of care exercised before the event by knowledge gained only after such event. Another difficult duty of a court in this connection is to properly set up for itself this theoretical imaginary “reasonably prudent person” whom the law has adopted as the standard or model in determining the question of negligence. Having succeeded in making the settings for the picture and having drawn the highways, the branching roads, the signposts with their legends — some clearly written and some quite illegible — we are then required to create a reasonably careful and prudent individual to read and understand the signs and to determine the road which should be taken. To accurately describe this individual is not an easy task. It is customary for a trial judge to instruct the jury in cases involving negligence that the standard to be applied is the care exercised by the reasonably prudent and careful person, and appellate courts are usually content to follow substantially that language. Now, in my opinion, it is probable that the trier of the facts, in such a case, whether he be judge or juror, thinks, perhaps unconsciously, of himself as a reasonably prudent individual. If he be considering a subject with which he is familiar, for example, the operation of an automobile, he decides what he would do or refrain from doing under the circumstances presented. If he be a very careful and cautious driver, he is likely to place the standard too high. If he happens to be a careless driver, he places the standard too low. It seems to me that this reasonably prudent person is just the ordinary individual who deals with the particular subject under consideration while he is acting as he ordinarily does act. Thus, if the operation of an automobile be the subject involved, it would seem that the reasonably prudent driver of an automobile would be the ordinary person who drives an automobile, and that if, as here, we are considering bank directors, the ordinary bank director, that is, the person who ordinarily acts as such a director, is the standard of comparison to be used as the criterion by which the requisite care must be measured and determined, and, unless the court keeps that in mind, in such a case as that at bar, there is danger that the court may impose upon the defendants a greater duty than is required by the applicable rule of law. The natural impulse of the judge trying sueh a case is to expect and demand a high degree of care on the part of such a bank director and to believe that the ordinary bank director is, as the judge is likely to conceive that he himself would he (and perhaps in fact would be), a very careful, conservative, prudent director. It is only natural for a judge to think of himself as a hank director of this ultraconservative type, rather than as a director of the average, ordinary type. He may forget that membership on a board of directors of a large city bank sueh as is involved here is usually and normally only one of many business activities in which sueh director is engaged. It may be thought that sueh a directorship is of sufficient importance to demand that the director give to it all of his thought, energy, and time, but that this is not the usual or ordinary practice is a fact of sueh general knowledge that the court must take judicial notice of it. It is commonly known that the ordinary director of sueh a bank devotes only a part of his time to the affairs of such bank and necessarily relies largely on the honesty, judgment, and efficiency of the executive officers to whom the administration of the details of operation of the bank are intrusted. It is well known that many men of ability, character, and business experience and connections are considered to be, and often are, valuable as members of the board of directors of a bank even though they are' not able to give a large amount of time to its affairs. There are often, if not usually, other directors who may not have so much ability or experience, but who are able to devote more time to the bank, so that, while the time which they do give may not be so valuable as others’, they may compensate for that by the greater amount of time given. Then there are the officer directors, who are paid for their services and who make the work of the bank their regular occupation and are, as they are expected and assumed to be, much more familiar with the details of the various loans and affairs of the bank than the nonofficer directors ordinarily are or can be expected to be. So that, although a court is, of course, anxious to require as high a standard as is possible with respect to the care to be demanded of every person holding the responsible and important position of bank director, yet it must not lose sight of the legal rule. of reasonable care thus applicable nor of the facts and conditions which, in actual practice, do in fact constitute the background and situation of the ordinary, that is, the ordinarily prudent director of a large and busy bank in a great city, such as is under consideration here, who, and not the ideal director or the kind of director which' the court would wish, must be accepted by the court as the standard of comparison in determining whether the defendants exercised the degree of care which such ordinary director would have exercised. On the other hand, the court must recognize that the most prudent man is. sometimes negligent and that therefore the ordinarily careful and prudent man may be at times careless and legally negligent. This ordinarily or reasonably prudent man cannot have any periods when he falls below this prescribed standard. In other words, the law having fixed that standard, the court must apply it to the particular transactions involved, and if, in connection with these transactions, the person in question falls below that standard, he is guilty of, and liable for, negligence, even if usually, or at all other times, he acts with proper care. The general observations just made, which seem to me to be unquestionably sound on principle, are amply supported by applicable authority. Thus the pertinent principles were stated and discussed by the United States Supreme Court in Briggs v. Spaulding, 141 U. S. 132, at page 147 et seq., 11 S. Ct. 924, 929, 35 L. Ed. 662, as follows: “It is perhaps unnecessary to attempt to define with precision the degree of care and prudence which directors must exercise in the performance of their duties. The degree of care required depends upon the subject to which it is to be applied, and each case has to be determined in view of all the circumstances. They are not insurers of the fidelity of the agents whom they have appointed, who are not their agents, but the agents of the corporation; and they cannot be held responsible for losses resulting from the wrongful acts or omissions of other directors or agents, unless the loss is a consequence of their own neglect of duty, either for failure to supervise the business with attention, or in neglecting to use 'proper care in the appointment of agents. * * * In any view the degree of care to which these defendants were bound is that which ordinarily prudent and diligent men would exercise under similar circumstances, and in determining that the restrictions of the statute and the usages of business should be taken into account. What may be negligence in one case may not be want of ordinary care in another, and the question of negligence is therefore ultimately a question of fact, to be determined tinder all the circumstances. * * ipjjgjy conduct is to be judged not by the event, but by the circumstances under which they acted. * * * Certainly it cannot be laid down as a rule that there is an invariable presumption of rascality as to one’s agents in business transactions, and that the degree of watchfulness must be proportioned to that presumption. * * * Without reviewing the various decisions on the subject, we hold that directors must exercise ordinary care and prudence in the administration of the affairs of a bank, and that this ineludes something more than officiating as figure-heads. They axe entitled under the law to commit the banking business, as defined, to their duly-authorized officers, but this does not absolve them from the duty of reasonable supervision, nor ought they to be permitted to be shielded from liability because of want of knowledge of wrongdoing, if that ignorance is the result of gross inattention.” In Wheeler v. Aiken County Loan & Savings Bank (C. C.) 75 F. 781, at page 784, it was said: “The law has not defined, and, in the nature of things, cannot define rigidly, the rules and conditions under which banks may lend money. In such business much depends upon trust, — upon reliance upon character, and business integrity, thrift, and capacity, which may often justify the prudence of a transaction which to lawyers, seeking to apply hard and fast rules, might seem indefensible and reckless. The customs and methods of the community in which the business is done are, for such community, a standard of prudence and diligence by which the responsibility of bank officers and directors is to be tested; and if there is ground to believe that there has been a reasonable conformity to such methods and customs, and absolute good faith and honesty of purpose, it would be unjust to hold to a personal accountability for loans which subsequent events proved unwise.” In Cory Mann George Corporation v. Old, 23 F.(2d) 803, at page 807, the Circuit Court of Appeals for the Fourth circuit stated and applied the rule as follows: “Directors are not insurers, nor are they technically trustees. They are agents of the corporation, charged with the supervision of its business, and, as such, bound to use that degree of care which ordinarily prudent and diligent men would exercise under similar circumstances. * * * We do not think that the directors were guilty of negligence because they did not foresee that what would ordinarily he a sufficient safeguard would be circumvented by the collusion 'between their faithless cashier and the faithless manager of complainants. As said by Judge Wallace in Warner v. Penoyer (C. C. A. 2) 91 F. 587, 44 L. R. A. 761: 'They are not to be deemed remiss because they did not resort to exceptional methods, or because they relied on the cashier’s supervision over the books and accounts, or because they reposed confidence in his reports of the amount and other clerical details of the assets and liabilities. They were under no duty to observe the extraordinary vigilance short of which a bank cannot be protected from the crimes conceived by a dishonest cashier.’ ” In Bates v. Dresser, 251 U. S. 524, at page 529, 40 S. Ct. 247, 249, 64 L. Ed. 388, the Supreme Court, applying the rule to the facts in that case, said: “The question of the liability of the directors in this ease is the question whether they neglected their duty by accepting the cashier’s statement of liabilities and failing to inspect the depositors’ ledger. * * * Some animals must have given at least ope exhibition of dangerous propensities before the owner can be held. This fraud was a novelty in the way of swindling a bank so far as the knowledge of any experience had reached Cambridge before 1910. 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 seemed warranted by the semiannual examinations by the Government examiner and they were encouraged in their belief that all was well by the president, whose responsibility, as executive officer; interest, as large stockholder and depositor; and knowledge, from long daily presence in the bank, were greater than theirs.” It remains to apply these principles, as weE as the applicable statutory provisions, to the present ease. The method adopted and followed by the defendants in administering the affairs of this bank, the size and character of such bank, and the general situation surrounding the defendants were described by the special master, in his report, in language which I find to be amply supported by the evidence, as foEows (pages 2-7, 359, 360; 361): “A loan committee of four members having control of the matter of lending the bank’s money was appointed. Another committee of four members was appointed, this having control of the bank’s investments. Very early in the bank’s history these committees were consolidated into one committee of eight members, having charge of both loans and investments. All loans of $5,000' and over had to be submitted to the loan committee and receive the approval of at least five members of that committee before the loan could be made. Loans under $5,000 could be made by any one of the vice-presidents without consulting the loan committee, but it was necessary that such loans be submitted to the loan committee at its regular meeting before business hours on the following morning. This committee met twice each day. At the morning session, prior to banking hours, all loans made during the previous day were considered and discussed. At the afternoon meeting, held after business hours, all maturities of the following day were discussed and marked for payment, reduction or renewal. At these meetings also the investments of the bank were fully considered. The purpose of this was to keep each of the eight officers who were on this committee in direct touch with all loans and investments in the bank. The committee was composed of four officers who were directors and four officers who were not directors. Each member of the loan committee was a vice-president of the bank. Neither the president nor the cashier was a member of the loan committee. “The following section of the report of an examining committee of May 5, 1922, found on page 98-A of the Minute Book of the bank, sets forth the method of doing business in the bank, namely: . “ ‘In the matter of loans and discounts, no officer of the bank should feel at liberty to depart from any fixed policy that has been agreed upon, and, when any loan has been considered and refused by the committee having charge of same, all other officers should abide by and observe such decision in the strictest sense. The system now in operation as to loans and discounts is most excellent. Until within the last few months there were two committees having charge of these matters, each consisting of four officers. One of such committees passed on bank loans exclusively, the other passing on all other character of loans. Within the past few months these two committees have been consolidated so that 'there is now but one committee composed of eight officers having control of all loans and other investments made by the bank. The thorough maimer in which this committee operates is shown by the following statement. A meeting is held each morning prior to banking hours and all loans made during the previous day are considered and discussed; during the day each loan of $5,000 and over is submitted to and must be approved by at least five of the committee; after banking hours each day the full committee meets and goes over the maturities of the following day. At these meetings the investments of the bank are fully considered. The result is that each of the eight officers is in direct touch with the loans and investments.’ “Each loan coming before the loan committee, no matter *how small or how large, was recorded on a loan sheet, the amount of the loan,'the name of the maker, and the security being noted. Previous to each meeting of the directors, the loan sheets for each day of that week were mimeographed, a copy for each member of the board being made, and these were distributed to the members of the board upon assembling at each meeting, each member being furnished with a loan sheet which described each and every loan .made during the previous week, and which indicated also the day of the preceding week when each loan was made. “A book was kept in the bank sometimes described in the record as ‘the $20,000 and over book’ and sometimes as ‘the $50,000 and over book.’ This book was constantly kept up to date and there was supposed to be recorded in it, in alphabetical order, the aggregate line of indebtedness held by the bank against any borrower amounting to $20,000 or over, and it was indicated as to each item on the book whether it was a loan made by the bank, or was an acceptance or a note discounted to the bank, and whether secured by collateral. This book was brought into the directors’ room on the first meeting in each month and it was the duty of the cashier to read to the directors all loans of $50,000 or more appearing thereon. The purpose of this book was to keep the directors in close touch with the large lines held by the bank. * * * “The bank from the beginning was so large that it was necessary to divide it into departments and to place an officer at the head of each department, giving him superintendence and control of all matters within the jurisdiction and scope of that department. These were the discount department, collection department, exchange department, individual bookkeeping department, country bank department, transit department, paying and receiving department, collateral department, safety vanlt department, and others. “About five hundred loans were made each week by the bank so that at each weekly meeting of the board of directors that body had before it for consideration approximately that number of loans. “There were about two hundred employees in all. By far the greatest number of these were engaged in one way or another in keeping the daily records of the bank. The transactions, of which records were kept, or notations made, averaged about fifty thousand each day. “Once in each year, as of the first of the year usually, a complete audit of the bank’s books was made by Humphrey Robinson & Company, Clearing House Accountants, of Louisville, Kentucky. “In addition, there was an auditing department in the bank. This department, with an efficient auditor at its head, was authorized to audit all records of the bank. It was the duty of the auditor to make reports of such audits to the cashier of the bank. The auditor had general' authority with respect to this matter and might go into any department of the bank at will and make an audit of its books and records. His authority in this respect was by resolution of April 20, 1923, made as complete as that of National Bank Examiners. * * * “This was a bank of prodigious size situated in a city of three hundred twenty-five thousand inhabitants. It had more country bank customers than all other banks in Louisville combined. On the day it opened it was the largest bank in the South. Its total resources were $52,567,554.51. Its weekly loan list contained on an average the names of about 500 borrowers. It became necessary to divide the bank into departments, placing a manager over each. Two hundred employees worked in the bank and at least one hundred and fifty of these were engaged daily in keeping a record of the bank’s business transactions. The active management and conduct of the bank’s business was, and had to be, entrusted to officers and agents selected by the directors. Due care did not require that the directors should spend all their time at the bank or that they should actively transact its business. They were not salaried officers. They were only required to use ordinary care in superintending the acts and conduct of the officers and agents whom they had selected and to use ordinary care in the matter of selecting and retaining in their respective positions such officers and agents, that is, such care as an ordinarily prudent and diligent man would use under similar circumstances. In determining whether they gave the bank such care as an ordinarily careful and prudent man would have given under similar circumstances it seems to me that its size and the extent of its business transactions must be taken into consideration. The performance of impossibilities is not exacted of directors. The law, it is true, is the same as to directors of both large and small banks. However, due care, which is ordinarily the standard of conduct for directors, varies with the circumstances. “Furthermore, it must be recognized that the circumstances surrounding unsuspecting directors where an active effort to deceive them is being made are very different from the circumstances surrounding directors when the officers are not trying to deceive. One is much more likely to be misled as to the facts with respect to a given matter important in connection with a bank’s affairs when a concerted effort is being made by officers within the bank to conceal the true facts, hide suspicious circumstances, and to cover up questionable indicia, than is the case when no effort is being made to conceal or mislead. * * * “They had implicit confidence in Brown and the other officers. The record is full of indications that they implicitly 'trusted the bank’s organization and were proud of it. Evidently they were honest. They were unusually regular in attendance upon board meetings and in this I think the evidence indicates that they were more interested than the ordinary bank director. They trusted Brown and the other officers just as the public generally in Louisville trusted them.” The special master based his ultimate findings of fact, to the effect that negligence on the part of the defendant nonofficer directors had not been established, except in a few instances, largely upon his preliminary finding that defendant Brown, the president of the bank, aided by the defendant Jones, the cashier, had, throughout the period of time here involved, deliberately, systematically, and for the purpose of assisting the said Brown to extract substantial sums from the bank and otherwise to further Ms own interests at the expense of the bank, concealed from the defendant nonoffieer directors communications from the Comptroller of the Currency, reports of bank examiners and auditors, circumstances indicating the character of loans and investments of the bank, and other facts which would have apprised such directors concerning the true condition of the hank and of the various loans and investments here involved. In considering these findings of fact of the special master, I am, in my opinion, bound to follow the rule that such findings, upon disputed questions of fact involving the veracity and credibility of witnesses whose testimony has been heard, and whose demeanor in so testifying has been observed, by the master, should not be set aside by the court unless wholly unsupported by any substantial evidence or unless clearly and convincingly opposed to the overwhelming weight of the evidence. Federal Equity Rule 61% (28 USCA § 728) includes the following provision': “In all references to a master * * * the report of the master shall be treated as presumptively correct, but shall be subject to review by the court, and the court may adopt the same, or may modify or reject the same in whole or in part when the court in the exercise of its judgment is fully satisfied that error has been committed.” In Tilghman v. Proctor, 125 U. S. 136, 8 S. Ct. 894, 901, 31 L. Ed. 664, the Supreme Court said: “The conclusions of the master, depending upon the weighing of conflicting testimony, have every reasonable presumption in their favor, and are not to be set aside or modified unless there clearly appears to have been error or mistake on his part.” In Adamson v. Gilliland, 242 U. S. 350, at page 353, 37 S. Ct. 169, 170, 61 L. Ed. 356, the rule was stated as follows: “So far as the finding of the master or judge who saw the witnesses 'depends upon conflicting testimony or upon the credibility of witnesses, or so far as there is any testimony consistent with the finding, it must be treated as unassailable.' Davis v. Schwartz, 155 U. S. 631, 636, 15 S. Ct. 237, 39 L. Ed. 289, 291." In Lake Erie & Western Railroad Co. v. Fremont, 92 F. 721, at page 731, the Circuit Court of Appeals for the Sixth Circuit, speaking through Circuit Judge Taft, used the following language: “The witnesses came before the master. He * * * had a much better opportunity than the court below or this court to judge of the weight to be accorded to the evidence of each witness. It is a settled rule in the federal courts that, in dealing with exceptions to a master’s report, the conclusions of the master, depending upon conflicting testimony, have every reasonable presumption in their favor.” To the same effect are Camden v. Stuart, 144 U. S. 104, 12 S. Ct. 585, 36 L. Ed. 363, Girard Life Insurance, Annuity & Trust Co. v. Cooper, 162 U. S. 529, 16 S. Ct. 879, 40 L. Ed. 1062, and numerous other eases. The careful examination of the record which I have made makes it clear, except as hereinafter otherwise indicated, that there was substantial evidence in support of the findings of the special master just mentioned, and that, to the extent that such evidence was disputed, there were presented questions as to the relative truthfulness of witnesses with respect to which the opportunity for personal observation enjoyed by the master gave him such superior facilities for discovering the truth that this court would not be warranted in disturbing such findings. The various transactions involved will be discussed and disposed of in the order in which they were passed upon by the special master in his report. Kentucky Wagon Manufacturing Company. For several years prior to 1924 the bank had from time to time made loans in substantial amounts to the Kentucky Wagon Manufacturing Company, a Kentucky corporation engaged, in the city of Louisville, in the manufacture and sale of wagons and other vehicles, the unpaid balance of such loans in June, 1924, aggregating approximately $500,000'; in addition to which the bank had made various loans, aggregating about $300,000, to the National Motors Corporation, a company organized with the financial assistance of the bank in. a futile effort to refinance, and thus save, the said wagon company. On June 25,1924, the said Kentucky Wagon Manufacturing Company was adjudicated a bankrupt. Thereupon the bank, in an endeavor to retrieve the loss which it had sustained in the making of the loans just mentioned, expended the further sum of $361,091 in the purchase, at 25 cents on the dollar, of sufficient claims against the bankrupt to enable the bank to control the disposition of the assets of such bankrupt, and, on July 8, 1924, the bank organized a new corporation with the same name, Kentucky Wagon Manufacturing Company, under the laws of Delaware, for the purpose of acquiring, as the bank shortly afterwards did acquire, through the medium of such new corporation as nominal owner, the business and other assets of the old Kentucky Wagon Manufacturing Company, and of eontinu-, ing the operation thereof, all with the oh-jeet of thereby ultimately recouping the loss resulting from its loans already mentioned. While it appears that the hank desired, if possible, and made some attempts, to recover the amounts so loaned through a resale of the business and assets thus acquired, it is clear that its ability to effect such a sale was at all times extremely uncertain and that the bank intended in the meantime to operate the new wagon company as a manufacturing enterprise regularly and permanently (at least for an indefinite period) engaged in the manufacture and sale of vehicle products, as a business venture. Notwithstanding continuously and increasingly heavy further losses arising from the operations of this manufacturing business, the bank thereafter continued, without interruption, to carry on such operations up to the closing of the bank on November 16, 1930, during which operations it expended, nominally in the form of notes and permitted overdrafts by the new company but actually in outlays by the bank in the operation of this manufacturing business owned by it, additional sums aggregating more than a million dollars. It is manifest from the record, and I find, that all of the defendants who were directors at the time of the ownership and operation of this wagon business by the bank had knowledge thereof but made no effort to terminate it. Indeed, the special master did not find to the contrary. Under these circumstances, I cannot avoid the conclusion that the acts of the bank in thus acquiring and carrying on the business of manufacturing and selling vehicles were beyond the scope of its powers as prescribed by the provisions of the National Banking Law and ultra vires. First National Bank v. Converse, 200 U. S. 425, 26 S. Ct. 306, 50 L. Ed. 537; Cockrill v. Abeles, 86 F. 505 (C. C. A. 8); Cooper v. Hill, 94 F. 582 (C. C. A. 8); Williams v. Merchants’ National Bank (D. C.) 42 F.(2d) 243; In re Kentucky Wagon Manufacturing Co. (D. C.) 3 F. Supp. 958. The following language of the Supreme Court in the first of the eases just cited, involving a similar situation, is equally applicable here (200 U. S. at page 438, 26 S. Ct. 306, 311, 50 L. Ed. 537): “As no authority, express or implied, has ever been conferred by the statutes of the United States upon a national bank to engage in or promote a purely speculative business or adventure, * * * it follows that the bank had no power to engage in such business by taking stock or otherwise. The power of a national bank to engage in the character of business which the articles of association of the thresher company manifested, as defined by the supreme court of Minnesota, cannot be inferred to have been possessed by the bank as an incident of securing a present loan of money, or as a means of protecting itself from loss upon a pre-existing indebtedness. To concede that a national bank has ordinarily the right' to take stock in another corporation as collateral for a present loan or as a security for a pre-existing debt does not imply that, because a national bank has lent money to a corporation, it may become an organizer and take stock in a new and speculative venture; in other words, .do the very thing which the previous decisions of this court have held cannot be done.” In Cooper v. Hill, supra, under circumstances like those presented here, it was said (94 F. at page 585 et seq.): “When a national bank has lawfully acquired real estate or other property, it may sell that property and convert it into money; and, in order to do so, it may clean it, make reasonable repairs upon it, and put it in presentable condition to attract purchas-. ers, in the same way that an individual of sound judgment and prudence would do if he desired to make a sale of the property. The authority to do these things is one of the incidental powers vested in the corporation. * * * q^e ¿ráy 0£ exercising this power is imposed upon the directors and officers of such a bank, and the authority to determine in the first instance when and to what extent it shall be exercised is necessarily intrusted to their judgment. Moreover, they cannot escape the discharge of this duty. They are bound to consider and decide the question at their peril. It follows that, when they have honestly and carefully considered and decided it, they ought not to suffer because, in the light of subsequent events, which could not be foreseen, it turns out that their decision was unfortunate. * * * It is common knowledge that a mine or a prospect for a mine is much more likely to find a purchaser, and much more likely to realize a fair price, when work is in active progress upon it, than when it is still and desolate. * * * We are of the opinion that an expenditure of this amount may be said to have been properly made in th'e honest exercise of a discretion vested in them, and that they ought not to be personally liable because the use of this money did not secure the purchaser they sought and expected to obtain. The unfortunate part of this case is that they did not stop here. * * * When no purchaser was found, they proceeded to expend * * * more in prospecting’ for paying ore upon property in which none has ever been discovered. It was not only beyond their authority as officers of the bank, but ultra vires of the bank itself, to carry on ordinary mining, manufacturing, or trading business,—much more, to expend its money in such a speculative venture as prospecting for ore where none of value ever had been found. * * * The officers of these banks are bound to know they are charged by the law with the knowledge of the extent and limitations of the powers of the corporations for which they act, and of their own authority as the agents of these corporations. * * * Every agent incurs a personal liability to his principal for losses occasioned by his unauthorized acts under the general law, and the officers of corporations are no exception to the rule. Upon this principle the directors and the other officers of a national bank become personally liable to the bank and its successor in interest, its receiver, for losses caused by their use of its funds for unauthorized purposes.” Applying the controlling principle here, it would probably have been proper for the bank merely to acquire the property of its debtor, the old Kentucky Wagon Manufacturing Company, in satisfaction of its claims against such debtor, and thereupon to expend a reasonable sum in attempting to make an advantageous resale thereof, ineluding such amount as might be necessary to put such property into condition for such resale. But to organize, as it did, a new corporation, of which it became the beneficial owner, for the purpose of not only taking over the business of its debtor, but also of operating such business for an indefinite period, followed by its actual operation thereof for several years, was beyond the powers of the bank, as the defendants were bound, and must be presumed, to know. It is clear that under section 93 of title 12 of the United States Code (12 USCA § 93), formerly section 5239* of the Revised Statutes, providing that, if any of the provisions of the National Banking Law are violated, “every director who participated in or assented to the same shall be held liable in his personal and individual capacity for all damages which the association, its shareholders, or any other person, shall have sustained in consequence of such violation,” all.of the said defendant directors, except the defendants Pirtle and Short, thereby became liable for the damages resulting from these ultra vires acts. The special master found, on evidence fully justifying the finding, which accordingly I must adopt, that two of the aforesaid nonofficer directors, the defendants Pirtle and Short, “were of unsound mind during the entire time they were on the board of directors” of the bank. It would therefore manifestly be unjust and improper to hold these two incompetent directors or their legal representatives liable for the damages resulting from these ultra vires acts of the bank on the ground that they knowingly participated in, or assented to, such acts, when they lacked the mental capacity to understand or realize the true nature of the transactions in question. Under such circumstances it cannot, in my opinion, be said that directors without that understanding or realization of the acts of the bank were guilty of the intentional participation in, or assent to, such acts on which their liability with respect thereto must be based. This conclusion is equally applicable to the question of liability for violation of the other statutes hereinafter considered. The contention of the plaintiff to the contrary cannot be sustained. The liability of the defendants in this connection is not, in my opinion, reduced or affected by the fact that in 1930, shortly prior to the closing of the bank, the bank, at the instance of its parent company, Banco Kentucky Company, which is hereinafter more fully discussed, transferred to Caldwell & Co., a brokerage firm hereinafter -further mentioned, its interest in this wagon business, in exchange for 100,000 shares of stock in said Banco Kentucky Company, for the reason that, assuming (without determining) the validity and propriety of such transfer, such stock proved to be without any real value or benefit to the bank and is not shown to have resulted in any reduction of the loss sustained by the bank by reason of these ultra vires acts. The special master, while apparently recognizing the ultra vires character of these acts, thought that various statements of bank examiners in their reports, from time to time, to the Comptroller of the Currency, expressing satisfaction with the course of the bank in this connection, had the effect of relieving the directors from liability for those acts. I am unable to agree with this view. Assuming, as is found by the special master, that these statements of the examiners were brought to the attention of the directors, it seems to me plain that such statements merely represented the views of such examiners as individuals and could not make proper what was, as a matter of law, ultra vires and therefore unlawful, nor affect the liability of such directors for permitting what they must be deemed to have known was unlawful. It is therefore unnecessary to determine whether there was common-law negligence on the part of the nonoffieer directors in connection with the expenditures just mentioned. The special master found that such directors were not, hut that the officer directors were, guilty of such negligence. Nor is there any occasion to consider the question whether any of the defendants were guilty of negligence with respect to the advances made by the bank to the old Kentucky Wagon Manufacturing Company prior to the said ultra vires acts, for the reason that, as does not appear to be disputed by the plaintiff, a Kentucky statute of limitations (section 2515 of the Kentucky Statutes) bars recovery for such negligence after five years from the date thereof, and these advance? occurred more than five years prior to the date of the commencement of this suit, March 30, 1931; and I agree with the special master that the evidence fails to show that any of the defendants were guilty of negligence merely because they failed, within such five years, to cause suit to be brought against other directors of the ‘bank with respect to the advances so made prior to such five-year period. I reach the conclusion that each of the directors except the said Pirtle and Short, while acting as such directors of the bank, knew of, and assented to, the said ultra vires acts, and they (or their legal representatives) are, therefore, liable herein for the damages resulting from such of those acts as occurred within the period of five years prior to the commencement of this suit and while such defendants, respectively, were serving as such directors. These damages consist of the net outlays made by the bank in its operation of this wagon business within the said period. The special master has found that the sum of $1,211,773.00 represents the total amount of such net outlays, and the presumptive correctness of this finding has not been disproved by any of the parties, and must therefore be accepted as correct. That sum, therefore, together with interest thereon as hereinafter indicated, is the amount recoverable in this connection from the defendant directors serving as such during all of the period mentioned, or the defendant legal representatives of such directors, deceased. The master, however, has made no finding as to what portion of this total loss was incurred during the term of office of the directors serving for only a part of that period, and, as the evidence does not appear to show this with sufficient certainty, I conclude that, if the parties are not able to stipulate in regard thereto, the court must determine, on the settlement of the decree, the amounts recoverable, with interest as aforesaid, from such defendant directors or from the estates of such directors, deceased, except the said Pirtle and Short. Wakefield & Co. From time to time during the period between March 24, 192-8, and October 1, 1930, the bank made loans, in substantial amounts, to Wakefield & Co., an investment banking firm in Louisville owned and operated under that name by one Mrs. Latta, and various other loans, nominally to certain employees of such firm, namely, Miss L. I. Harris, stenographer, Mrs. Fannie G. Schweitzer, bookkeeper, and Leo A. Meagher and J. M. Greer, clerks and salesmen, but actually for its accommodation and account, on the total of which loans there was an unpaid balancer rb the time of the closing of the bank, amounting, as found by the special master, to $1,-479,000, for which the plaintiff claims that all of the defendants are liable, both on the ground that the making of such loans, by the officer directors, was improvidently and negligently approved by the defendant nonofficer directors, and for the further reason that such loans were so approved with knowledge by such directors that they should be grouped together as a single line of advances to the said Wakefield & Co., and that, when so grouped, they were in excess of the maximum amount prescribed for a single line of such indebtedness by section 84 of title 12 of the United States Code (formerly section 5200 of the United States Revised Statutes), providing, as amended by the Act of February 25, 1927 (44 Stat. page 1229), 12 USCA § 84, and at the time here involved, that “The total obligations to any national banking association of any person, copart-nership, association, o^ corporation shall at no time exceed 10 per centum of the amount of the capital stock of such association actually paid in and unimpaired and 10 per centum of its unimpaired surplus fund. The term 'obligations’ * * * shall include in the case of obligations of a copartnership or association the obligations of the several members thereof.” Plaintiff claims that therefore the defendant directors, by permitting these excessive loans to be made, are liable for the resulting loss, under the provisions of section 93 of title 12 of the United States Code (12 USCA § 93), providing that “If the directors of any national hanking association shall knowingly violate, or knowingly permit any of the officers, agents, or servants of the association to violate any of the provisions of this chapter ® * * every director who participated in or assented to the same shall be held liable in his personal and individual capacity for all damages which the association, its shareholders, or any other person, shall have sustained in consequence of such violation.” Before determining whether any of the defendant directors knowingly participated in, or assented to, the making of loans in excess of the maximum prescribed by this statute, the question whether any such excessive loans were made must be considered. That question cannot be determined by merely ascertaining to what extent the total loans to a single borrower, made at any time or remaining unpaid at the closing of the bank, exceeded the statutory limit, which, in the ease of this bank at the time here involved, was $609,000. Whether any particular loan to a borrower was thus excessive depends upon the question whether, just prior to the time of its making, the amount of the existing obligations of such borrower to the bank was such that the making of this loan either caused the total of such obligations to exceed the statutory maximum, which was not exceeded until such loan was made, or else increased the excessiveness of the total of such obligations, which was already excessive before such loan was made. In other words, when a receiver takes charge of a national bank, the amount due to it from a certain debtor may be less than the limit fixed by law and yet the officers and directors may be liable for all of that amount so due if, applying the correct rule, it be found that all of such amount was lost through the making of a' loan which, at the time when made, was excessive, and conversely. Of course, in determining the amount of the loss and the amount for which officers and directors are liable, it is necessary to deal with subsequent periods, but this is for the purpose of determining the amount of the loss to' the bank resulting from an excessive loan. For example, in the ease of this hank, with its statutory limit of $600,-000, if a debtor first borrowed from it $50,-000, and then another $50,000, and continued to increase the amount of his loan by $50,-000 from time to time until he owed a total of $550,000 to the bank, none of this would be excessive because the total amount would he still within the legal maximum. If, however, while owing such $550,000, he came into the bank and increased his loan by $100,-000, although the $550,000 originally borrowed, which at the time when the new loan was made was within the statutory limit, would not become an excessive loan, yet the entire additional $100,000 of new money so advanced would be an excessive loan and would continue to be so until it was actually repaid to the bank; so that if, when the receiver took charge of the bank and proceeded to wind up its affairs, he found that this indebtedness of $650,000 had been reduced to $600,000 or less, it could not be successfully contended by the officers or directors that there was no liability on their part for the making of the said excessive loan merely because the entire amount so due did not then exceed the limit. Questions as to the excessive character of the loan and as to the original amount of any such excess must be determined as of the time when such loan is made. If any loan of money by the bank to a debtor at the particular time when it is made causes or increases an excess of the total obligations of such debtor to the bank beyond the statutory maximum, all of that loan is illegal. Corsicana National Bank v. Johnson, 251 U. S. 68, 87, 40 S. Ct. 82, 64 L. Ed. 141. Nor are renewal notes of a debtor, even if the amount thereof causes, or increases, a statutory excess in the sum of the total obligations of such debtor, to' be considered as excessive obligations, within the meaning of this statute, except to the extent that such renewal notes represent actual outlay by the bank made while the total obligations of such debtor to the bank equaled or exceeded the statutory maximum. McRoberts v. Spaulding (D. C.) 32 F.(2d) 315; Payne v. Ostrus, 50 F.(2d) 1039, 77 A. L. R. 531 (C. C. A. 8). For the loss sustained by the bank from the making of an excessive loan, the defendant directors of the bank knowingly participating in, or assenting to, such loan, and only they are liable herein. The special master found that all of these loans were secured,' when made, by proper and sufficient collateral; that, because the defendant Brown was using Wakefield & Co. as a means of obtaining the proceeds of these loans for his own personal benefit, he fraudulently caused to be concealed, from the non-officer directors, reports of bank examiners, letters from the Comptroller of the Currency, and other,, information which would have disclosed the character of such, loans as loans to Wakefield & Co. in excess of the statutory limit; that such directors did not have such information, had no reason to doubt the propriety of such loans, and, in approving them, relied on the officers of the bank to whom they had intrusted the administration of the details of its affairs; that such directors were not guilty of negligence in connection with such loans; and that, although the defendant officers were liable for the loss resulting from the making of these loans because they knew that such loans should be grouped together as Wakefield & Co. loans and, when so grouped, were in excess of the said statutory limit, yet the other defendants, being without that knowledge, were not so liable. Except as hereinafter pointed out, I am satisfied by the record that the findings of the master just mentioned are supported by substantial evidence and that the court would not be warranted in setting such findings aside. The nature and basis of these findings are indicated by the following quotations from the master’s report (pages 84r-88), which I adopt: “Of course, a bank president who has deliberately made up his mind to use the bank’s funds in his personal business and speculations must think out a plan or scheme by which he imagines he can safely do this. •* * * BroWn clearly determined to use Wakefield & Co. in his scheme for making personal use of the bank’s money. * * * It is perfectly apparent that Brown and Jones, without protest from any member of the loan committee, were designedly omitting to read parts of the reports of the examiners, concealing letters from the Comptroller, fraudulently evading the demands of that office, and continuously misleading the non-officer directors. The covering up which Brown and Jones were guilty of, and their acts of concealment in the presence, and with the acquiescence, of the other officers while the board of directors was in session, strongly indicates collusion between these parties, the purpose of which was to enable Brown, without the knowledge of the nonofficer directors, to successfully extract funds from the bank in the name of Wakefield & Co., or its employees. * * * It is claimed that certain letters addressed by the Comptroller to the directors furnished actual notice to the members of the board of the fact that debts of Latta, Greer, Harris, Schweitzer, and Meagher were to be included with the debts of Wakefield & Co., and that there was consequently an excessive loan to that company. I do not think that any of these letters reached the board of directors notwithstanding the recitation in the minutes to that effect. * * * It is satisfactorily established that the minutes, after being read to the board, were fraudulently altered so as to show the presentation and consideration of these letters. The concealment of these letters from the board, and the fact that such questionable, not to say dangerous, means were resorted to to accomplish it, demonstrates the character of the collusion with which the directors were unknowingly surrounded. * * * There was ample motive for withholding the letters from the board of directors. The great weight of the proof is that they were withheld, and the alteration of the minute book, clearly established, is really a potent circumstance to prove that the letters were in fact withheld. The fabrica