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| || FDIC LIBRARY SPEECH OF ASSOCIATE GENERAL COUNSEL NORRIS C. BAKKE BEFORE SUPERVISING EXAMINERS CONFERENCE, APRIL 27, 1950 ; p*s H *b^T<> t>C\ April 87# 1950 UK3AL »g«w»«TmTT.WY ùV BANK DIRECTORS In hit brief introductory remarks to you on Monday, Mr* Sailor said among othar things that a w proli«» ara continually arising* The statement la axiomatic to Ufa In general, and the fact la what gives basis for tbs legal profession* Much as most of you might wish there seems to he no escape from legal problems la your work i hope ve can help keep them at a minima» for you* She particular problem se east to consider briefly this morning is the legal responsibility of directors* X think I need not tell you hoe close the business of bank examination Ues to this responsibility of directors* for example, Mr* Sailor said In his spseeh to the Eastern Regional Conference meeting in this city ¿ust a year ago -"Any examination which discloses matters of significant criticism, or of importine* ©therein# is ordinarily concluded eith a conference between the examiner and the directors# In order that the matters requiring the special attention of the latter may be fully reviewed to insure their understanding and to determine proposed corre«* tlon.** With the development and growth of banking legislation in this country, particularly since the turn of the century, breeder powers have been prescribed for the chartering authority to malm periodic visitations or inspections to determine that the hank was not exceeding its statutory powers* fleperelly it may be said that the bank directors9 legal -2 - reeponsibility 1« of taf© kinds, vi*: statutory liability, è.«* for noncompliance with thè lava of tha «tato for fallure to perfora thè dutiea imposed on them by la», and «aconà, eoraaon l w duty under dacisiona of our court© holding thè diraetora raaponaibla for loases ©uff«rad by dapoaitora and otbars bacana« of negligane» or carólaaanaa« in discharge of dutlaa net apacifically provldad for by statuto. In thia davalopnant of bank lagialation »hieh I mentioned a aoaent ago, thè part playad by you aaa and thè «xaainera aorking undar yon bai baan and continua« to ba iaportant, bacana# it la tfcrough yonr suggestiona and reeosaaendationa that nev dutiea devolve t^pon direc tor», and aban tima naa dutlaa ara aufficiantly definite and extensiva they frequently cryatalize iato statuto la», and there aay be times successive fallares to carry ©ut your auggaationa ara tha proximate cause of a 1osa, that financia! UabiUty vili attach t© tha directora, and thia liability aay attach vithout vaming fron tha axaalnar, if tha director falla to do »hat an ordinary prudant man would do under tha circunstancia.. da Kr* Qppagard indicatad to yon on Monday, there ara at Xaaat 58 practicas that bava baan daaignated by tba Corporation ai unsafa ayfl unaound. Pro» a reviev of tba litigatad casas, as Mr. Qppagard indicatad to you, it appaara tbat thara baa baan a ataap of dis approva! by tba coarta on a larga number of thaaa practica» and aa to 'títioaa, it la reaaoaable to suppose that in tha avant that inauraoca saa tarainatad that diractora liability uonU attach if it »ara «bovn tbat a 8ubsequent fallure of tba back »ara cantad by tba unsafe practica indulgid in« Ccmvertaly, it vould not MetiwurUy follow that director» vould ba liabie it thè bank irere forced to ciò««, becauae of ahrinkag» oT depoeita cauaed by thè terminati©», or inaurane«. A colepi« or year» (NP it Xookad like wi aight bave a legai t««t or tfei» *u«etion vhen tho Corporation va« «ned ror cancellili« thè inaurane« or a tank la itane*«««, bui thè Preaident «ot colà fe«t «ad abandoned hi« «a««* ■SbaitBank director» Say'«et nee«»«ariiy Ubbie even thougb oar Board find» that thè bank ha» been «uiity or unaafa «ad unsound u r i n i l e « « » m i n fili TOTIIIIHHII 1 on oar Board to taralaeta inaurane« o b lig a to ry findia« baa baaa aada that tha praetiee vaa unaafe* «ad lj£|g|aMBar inaurane« ia teralnetad, thè finding of tha board ia aot conciliaive unleas «upported by aubatantial eviàence, a «uaaUosi vhieh tha coarta vili in a graat autority or eaeea eXuays aatartain. Sha point X bava baca trying to aaha bara ia veli illuatrated by tao laudili« casa» on thia iubjact, both or vhieh ara «aoted tram, ia *• B. Strania* wnaeirindu» ia yeur aeaalnara* hook of inatruetiona. la ihoaui v* teyior caaa, 224 U.S* 73# tha Court held tha diractora vara Uabia becauae thay fallad to haad tha diraotlon of thè «rara!nera vho had told thaa that thè doubtful aaaata of tha baak vera over talee tha capitai, ubile ia Aadaraoa r. khan, 7 Fed. Supp. 924, vhere tha WHilaara coadoaad certain ultra virai «età of tha diractora, tha Court hald that that eould not Haffect tha liahiUty of auch diractora for paraittin« vhat thay «uat ba deeaed to bava knovn va« unlavi'iii"* »k - Skia pois* illustrât** too, tfes protoios tfeat youamn asd our Board. ara up against ufeas jrou aad it ara called upon ta paa» os tha factor of bmk mmnageeaaat* la visa of tfea atandarda tfeat feass fessa davslopad ovsr tfea psars# tfea problem ta sot too difficulté but X m surs us ail rsali** tfest tfe*r* «WM» ***** «* *tt«pt «a tfes part of tfea eraminer ta tsll tfe* dlrectora feou ta rua tfeair baafe pats outaids of pour *®fe*ra ol spsratisos« ïa otlisr « w ü # tfea la» plaças tfes raspoaslfeility of rusais* tfes tssfe os tfes dirsctors.» and as as tfeap violais so la»# as9 sssi* la unssfs asc. uasound practices, pou m n m à pour «xaaioara sfeould fes as circuaspact as posslfels in pour rsooa*sudations on nsaagseni if tfes vorda ’free satsrprias” «rs to bava asp æaaing at ail# so doubt pou sas ara ail asars of tfes lav tfeat feaa recsntlp in pan forlt rsfsrrsd to aa tfes ”PrtiÉ*ai Msos*’'ruX*, in 000 *» Bftctloa vitfe iavastasat of ©rust funds, ufeicfe la indicative of tfes trend to libsrsltss iavastasst* of sucfe fonds* fou as» ars alao «cars tfeat tfes 1*0*1 rslatloaskip festwssa tfes daposltor asâ tfes feasfe la tfeat of a dsbtor and a crsditor, but tfeat tfes rslatiosafeip festssss a ôeposi^ % tar sad/ar » stockholMr nagr t» tbot of • teu»t « M M * mafeor *f court m r" m é m n m M M M * •»* o » 1m m a» teU< Strietiy «g**Hng, it i» not ïmwn of tlM laek of idoatlty of ttM reo, i.o. o » « . <*• tfeat tfea spacial cars requirad of basât direciore sas comparable to | tfeat of tfes trusta* aad auaarou* casas usai tfea tachaical trust taras in deecribing tfes dirsctors’ légal respoasibilitpo Sas Williams v» McKay, *0 1. J* If* 109* AS X study tfea trsiiA of currsat decisions, X tfes courts ara bscoalng sors liberal in tfesir aaalpsis of tfes «5 ~ director»’ respoaalBllity «ad »«ylag that they «re aot guaraators of tu« ««ali«* fuaàs But «re efcargtd oaly under thè "prudeat «ia8 rule. tMe lead» us to « furtfcer coaaidaratioa of thè queation vhlch ttr* Qppegard taucfceà oa Mir ii.Uiiim ululi, «ad ^ich va» raiaed pretty directly By thè Asatatant Attorney deaerai of leva thè other day vhea he apoke to thè Itidapeadeat Baakera Meeting la Bea Molata# Shere la no deaying that there la a groeiag reaeataant agstnst ’assuajed power’1 ao-ealleà By thè Bank supervialag agende*, «ad to thè exteat, of coarse, that theae agende» ara usurpine thè fuaetioaa of haak aiaageaaent (I do not conceda that they are), thè resentsaeat la ¿ustifiad* Out in lo«a thl» cry was ralsed la defasse of atatea righi». The prohleia, fcovever, la aot aa ainple aa that, «ad 1 thlnk It la very fundemental* I ca& Illustrate thè point 1 sa trylng to nafta here By referriag to say friend Hlcbard frefz of thè Beatrice state Bank la HeBraafca. to some Baskara, and 1 thlnk to soste of our ovn poople, he * B u t T t o and «pparaatly to a largo and poverful aeganent In ter Banking fraternity, he la In fact a servant of Brotherfcood. X bave Beau told that eoa» of hia Ioana Beve Baca crlticized Becanee they «re aot properly eeeured. He eaawera By aaying he knove hia euetosaer» and that they vili pay. Who la rlg&tt Oaly tino can teli* thè aatiwalner Juatlfle» M a crltlelaa on thè ground that thè Ioana «uit Be teatad accordlag to prove« Banking standard#, vhile Trafz juatlfies thè leena on Bueinea» conditiona aa thay are today. there aaee» to Be a definite eapaaaion of Ioana la tha consumer lendine field «Mah aeans an iacreedng volai» ©f cheractar Ioana, fou aay «* * Ituve gaaa the rscQ&t gtoipy ol thè T^ltliii bmtevtòo ÌMMI been âoiiig * large business on gingie signature, noncollateral note« vith g loge t ratio that mes aegligible. 2f theae leene «re «itili» thè «tatutory limite yho can eay «liât gay certainty that they «re gagà or baâ« 2 do net envy you aen in thè reaponaibility that yeu bava ia thi» connec tion, beo«ligi 2 under»tend boa difficult it ie t© that sust *tenderda geared to es del» fftatIp** describe» thè»# conatantly chang- iag condition», agd it la ia thi» fieli g# supervision tbat your reco»* canditioni to thè director» ara very important« fou ce?» ggggt i» ggay case» gay tg thè director» a» gaio Xxk ”Able*g tirigfr Roga** to gay *2 a» aargiag you” beoenee gg 2 bava aiready indieeted, aita thè «miai a duty ariaeg vhich if ignored gay agli gita riga to director» liebility, /CdsCtsr Again, on thè other hend, toast approvai, or faiIure to ger» by\Our examiner», dooa »et eas^ge thè director li tfeere ha» beau aa actuel violation of thè laa» fhis occurred in thè case of gang a* Mspp1» <afr» et ala 37 6*5. (2d) 23 , vhich erose in connection aith thè l’allure ©f tìl§ FftTlttICy SftalOQftX M URS iû PôJPKSxÊ^Tp flrgilllft WÌWKP© wl® M B » Bflwl a» excessive to a Realty hge been fonali by aa» Intere»ted in thè success «I tha beat, to boli segai rasi astata ossea by thè bankt ab# deal at thè tlse it sas esse aaaaad perreetly sound because thè vtha of thè reai estate usa aera thaa to cerar thè «»tira indebtedness of thè Healty p»«p| p*»y hot **hea tfnBgr *»a other vaine» fall sherpley thè basii railed it aae diecovered that thè lest $8 ,^ 5 0 lesa to thè Realty ecepany vas ia violatimi of thè statate, and in thè suit instltuted by this Corporation se vara allosed to raoovar» -7 - Star* m i aa ln tereatin g sid a llg h t on th a t eaa*. A fter tita v*rdict N l U n i occept«d by th* court «nd th* Jury diachwrged, and a notion fwr a ae* t r i a ! overrulad, tasar* «m fauna aaoag the papón la th* caao * yellow ah**« * f paper «a vhlch una « r lttm the fo llo v iag - ,T— “ aa «b* haak «om inar* ana th* I W «M anara a u a*« racognia* th* $8,«50 loan «o ha lU * g * l, hjr not «arnlng th* baok ñor requesting laM diat* U quidatlon, na* taklng le g al actionj th* Jury M l n * th* tm a sa e tie e «aa l*g*l «na th* hank in cu rrid a* damege". Th* dlacovory of th la una « » » «a oa* o f th* raaaona tor a na* tarlal, hut, 1/ íl a m , th* court dleregardad 1«. iag aa abovlag th* r— anaína lim i»h t la int*r**t- «raí of *t laaet no* Juror *ho «a* •uppoaed to havo «rlttaa it. Se«» *f yw» *h* a*ar r— w h *r th* eaa* **y r*c*U wheth*r our «artwr got * daawrtt-aa* oa that oa*. It la ttf* iat*r*etlng «o not* that thla eaa* la «atheritgr far th* atata— « .»It vould h* uajaat and laatpltafel» to p*mlt th* reeaiver te cá tala a U hmaflta derivad froa th* transant1on and place a U loe*** oa the director*" and Hhatawr of tala* th* haak racorared f M « th» horre**** on aeeeuat of the (eaaewli*) loan vould ge la diaination of daaagt*"* 1 f thla principia ehould ha »»pilad to all of our eaaaa la It 1a quaatlonahl* it th* 1MC could aalatala aa ection for director*' lihblllty if it haa h*«a aada «hale. I m m m that all of you w t t w the »took argument that was used against the insurance of 1k*<,>li> deposits; vis.*# that It would result Is careless hanking* Saak has sot besu our experience# due so dotibt to luproved task supervision. nevertheless# 1 as persuaded that there ha# toes a lessening of the urge to task, official# for circumstances resulting is our having to give relief to a distressed tack* Certainly it has host ay experience since being vfth th# Corporation that there he# been sympathy rather blame for the defaulter* fhia sill sot sake it map easier fear ns to — i«4ui4w directors* liability oases* Seas is the very bad situation at *ryor# OKiaBaas# where tne loss was over a half b >iiion dollars there was a lot of syapathy for tbs thief* 1» have started a directors1 liability suit there and It sill be very interesting to vstijh. developments. As you are all aware nearly all of the purchase of assets cases which we have had in the last few years have been due to defalcations, and in those cases it is difficult to make out a case of directors' liability, because in most cases, the defaulter has to work very secretly, and in a number of our cases, it was quite by accident that the shortage was discovered. As Chairman Harl says, quoting familiar baseball language "You can't hit 'em, if you can't see them", indicating that no blame can attach to your examiners or the directors either where there seems to be no sure way of discovering the irregularities. 9 « Bevertlsg a momnt to thè Hassu*ptio» of power" which X aentioned a aoMrt ago, and te Mr* Oppegard'a cossnents Mondai oa Banking business teelng conducted in thè patelle interest, for a nuaiber of yaars follovtog thè turo of thè ceatury there vas a very definite legai concept «bracci in thè phra.se raffeeted vith thè patelle interest*1* tedi Industries end teuslnesees ae railxoads, public Utilities, express ccepanies, ebe*, vhleh hed a lame and direct contact vith thè patelle vere so desesibed, and thls earrieft out thè enlarged conceptloa of thè polle« power of thè State to thè effeet that greater control would he exercised over sach industrie* end buslneasee than over thè erdlnary private enterprises. The hanhing teusiness vaa anong those se eensldered thereby charglng thè tank officiale vith a hlgher degree of cere end responsibility tovard thè patelle than vaa atteaient open other busineònes* Thls, yen eia reedily uaderatand, le eeaslsteat vith thè Idea of trasteeship È£éE0MJÀ vhlch X dlseuseed a tm* sdnutes ago« Bovever, in thè »m thr case In Sev Torte, 291 S*S* 502* frequently referred to as thè Sev York Mills case, thè Stupra* Court dteeadcnad thè theory of “affeeted vith thè patelle interest**, or accordine to thè atateneat of dhdge Mente in thè State* Shop Meritane Caie, annouaced January 3# W i thè theory vaa ditehed* The effeet of this nay he te reduce thè hitfi degree of esre vhlch vae required of tante dinoterà vhlle thè dottrine vai in effeet* Xt vili he intereetlag te vateh vhether er net thè coorte vili fellsv thle Una of mescming in haute directora* eaaes* - 10 ?hose of m idi© heard Professar Rogers yesterday «111 reaeafeer that he qpoted J. 1* Kobertsaa, Bepttty Controller of thè Cmitosyi as having eald, nRiskles» bBnklag 1» no banklng at all*” This le rather a significasi ©tatenent coa&ng trai one la cucii a 2x1#, place of authcrity la thè henklng ha®iacee la thè tfotted State», but le tfcorougbly coneisteat wlth thè thinklag of this Corporation as It lae hesa successively ennounced by Ite officers. he m There can p e s t i o n hot that thè federai Beposit Insurance Corporation \ 1« cowaitteà to our dual arotea of teatiag as a free eaterprise syetea and certaioly «e «est agre» that that coatesjplatee thè takiag of nomai rlske hy haafrtag officiale. So long as our % m eoatenlate» this mmmUs theory ay cotica le that tha coarta «111 attempi to gire reaeoaehle leevay to heak director© im thè m m & m m t aad operatioa of thelr tank». fhis does not «Osa, honeter# that thè ccurte relax la thelr nualab&eat of director» «ho violate thè lev heeanes «e are a H ««are of thè fsct that «bere prospective lum etepe la discretion le auuy* fiat «ili aot pernii ay coaaent oa S* 1» strofa*# uhifth x aeattoned earller la illese reaark», but 1 hope that aa your ila® pernii» yen «111 reread end reetaiy thie aeaoraadua, shich la a pari of your hook of iavlmtldttf* 1 aleo «ish to la» corporate ae a peri of thle addrese tha eereed eatltled "Respoaaibilitlee of a Beai Director" «ritte» a fev yeare ago hy a» J. Veigel, a fomar Ccggaiasioner of Beale» of thè State of Xiaaeeeta, «hlch «ae furniefced aa hy our friend, Mr. X« I* Amundaon, aaothar fonar Cotaaissioner of Beak» of maasaota* ! . H «* X also vant to express ny perconal appréciation to Kr. Anderson of the Coqptroller of the Chirreacy's Office, for raklng amilable te ail of ns the Ccagtroller,s study cm the "Buties and LiaMlities Of Directors of national Banks1*, Fora IbVf, Treasury Bepsrtaent, Office Ucægptroller of the Currency, This la a soit excellent stateaent and 1 hope th&t each of you eül take tins to study it carefully. In conclusion, X thlsk the dut!es of tank directors hâve bee» very uell suunarized in a recent Bew York case, vhiCh X a» taking the llberty of $ioting! **(1) Directors are chargea vlth the duty of reasonable supervision over the affaire of the Bank, Xt is thoir duty to use ordinary diligence in ascertalnlng the condition of its Business, and to exercise reasonable control and super vision over its affaire» (2) fhey are not Insurers or gtaarantors of the fldellty and proper cosduct of the exscu* tive offlcers of the Bank, and thsy are net responslhlo for losses resuliiag fïoa thelr vrongful acta, or ouïssions, provided they bave exercised ordinary cure in the discharge of their ovn duties as dtrectors* (3) Ordinary cars, in tfct» natter as in other departnents of ths lav, suons that degree of cars vhich ordinarily prudent and diligent »en vould exercise under sladlar circunstaoees. (h) The degree of cars required further dépends upon the suh^eet to shich it is to Be applied, and each case nust be deternlaed in viev of ait the rtriunwtaiiiss » ($} Xf nothing has cane to tiw* knowledge to üMdttm suspicion that sonsttdng is g?^wg 12 - vrong, ordinary attention to the affairs of the institution Is sufficient. If, upon the other hand, director© know, or hy the exercise of ordinary core should hav» kaova, aay wctstv idilch would avahen auspicien and put a prudent man on M s guard# then a degree of cara coatteasurate vith the evil to ha avoided la required, and a vant of that care maltes them responsible. Directora cannot, la Mustiee to thoaa vho deal vith the bank, shut their apta to «hat la goiag m around the«» (6) Directora ara not expected to ratch the routlne of arery dap*a business, but they ought to bata a general knovledge of tha manner ln vhich the bank*s busineae la conductad, and upon vfcat securlty Ita largar Unas of cradlt ara giren, and gMm»»n.y to kaov of and gire direction to tha inportant and general affairs of tha bank* (7) It la incumbent upon bank dlrectors ln tha exarelaa of ordlnary prudence, and aa a part of thalr duty of ganaral supervisión, to cause <tn examlnation of tha coaftition and raaourcea of tha bank to ba nada vith reaeonable frequeney.* Oallln r* National City Bank of New York, 273 »«Y.8. 87, 9$, 152 Mise. 679i 7 789, nota 79 ¿¡/, Yha other areaing 1 heard a atory vhich l thlnk la apropoa of tha occaslon* A frlend of nina orar ln Virginia has a son alght yaara oíd* One afternoon recently vhile tha aothar vas avay the son bacsaas engaged vith another lad about tha sao» aga in a rather riolent physical encounter and tha subject of thia atory suffarad a brain con* cucalón ao it ras necessary to ruah hin to tha hospital, vhere it developed that tha injury vas not seriou® and the boy uaa sufficiently rarlrad so ba could go homo that aftarnooa» Meanvhile, of couraa, his - 13 - aottar had heard about It «aft m her return hose among other questions she ashed him, "Who vas with you in the ambulance?”, and the little hoy replied, "Musale, X do not know« 1 vas not there." when of the hanks that you examiners are checking mi get into trouble serious enougi to result in a loss resulting from the carelessness or neglect of the directors, the hank diraetor will not he heard to say, "I was not there", and in the last analysis that is the real massage that 1 uant to leave with you this mernliig«
@FedFRASER