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p*s H *b^T<>

April 87# 1950


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
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


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.


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 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


m é m n


M M M *

•»* o

» 1m m a» teU< Strietiy «g**Hng, it i» not

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,

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
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
ratio that mes aegligible. 2f theae leene «re «itili» thè «tatutory
limite yho can eay «liât gay certainty that they «re gagà or baâ«


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


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**


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»
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


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


>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


of thè

ceatury there vas

a very

definite legai concept «bracci in thè 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


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.


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

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


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



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


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


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«