power. Gauthier v. Morrison, 232 U. S. 452, 461, 34 Sup. Ct. 384, 58 L. Ed. 680.

The

cited leave no room for doubt on this point. [by the courts in the exercise of their general The cases of Iowa R. Land Co. v. Blumer, 206 U. S. 482, 27 Sup. Ct. 769, 51 L. Ed. 1148, and Missouri Valley Land Co. v. Wiese, 208 U. S. 234, 28 Sup. Ct. 294, 52 L. Ed. 466, relied on by the plaintiff, are not apposite. lands there in question were within the place limits and at the time of definite location were free from other claims; so they were not excepted from the grant, as here, but passed from the government on the definite location. It follows that as to the three tracts erroneously patented as before shown the railroad company had no title, legal or equitable, prior to the issue of the patents. Up to that time the title was in the United States, and of course no prescriptive right was acquired against it under- the local statute. Besides, the title received through those patents was turned back to the United States before the trial and this operated to restore the three tracts to their prior status as public lands. The title under those patents-and it was merely the naked legal title did not remain in the railroad company for anything like the period named in the local statute, if that be material. As to the other two tracts the railroad company up to the time the suit was brought had nothing more than pending lieu land selections which required the approval of the Secretary of the Interior to make them effective (Wisconsin Central R. R. Co. v. Price County, 133 U. S. 496, 512, 10 Sup. Ct. 341, 33 L. Ed. 687), but as yet they had not received his approval.

[7] Whether the tracts as to which the swamp land claim is still pending were such as came within the terms of the swamp land grant is a question of fact the decision of which is expressly committed to the Land Department; and this also is true of the question whether the tracts covered by the railroad company's lieu land selections were when the selections were tendered so occupied and appropriated as not properly to be subject to acquisition *in that way. The approval or disapproval by the Secretary of the Interior of such lieu selections is not merely a formal act. It involves an exercise of sound, but not arbitrary, discretion and makes it admissible for him, where a selection is proffered for land which a bona fide occupant, misinformed and misunderstanding his rights, has reclaimed and improved at large cost, to reject the selection and hold the title in the United States until, as this court has said, "within the limits of existing law or by special act of Congress," the occupant may be enabled to obtain title from the United States. Williams v. United States, 138 U. S. 514, 524, 11 Sup. Ct. 457, 461 (34 L. Ed. 1026).

[8, 9] As to the fifth tract the railroad company at the time of the trial held a patent issued pending the suit on a lieu land selection but recently initiated; so the prescriptive right asserted by the plaintiff could not possibly include that tract. If, as he asserts, the tract was so occupied or appropriated that it properly could not be selected and patented in lieu of land in place found to be mineral, that may afford an adequate basis for a suit by the United States to cancel the patent (Diamond Coal & Coke Co. v. United States, 233 U. S. 236, 34 Sup. Ct. 507, 58 L. Ed. 936), or afford a basis for holding the railroad company as a trustee of the title for

[5, 6] The situation then at the time the case was heard in the trial court was this: The railroad company had neither the legal nor the equitable title to four of the tracts. Instead, the full title was in the United States and all existing claims to them arising under the land grants and other public land laws were pending in the Land Department, whose officers were specially charged by law with their examination and determina-him if, notwithstanding the silence of the tion and with the disposal of the title ac- present record on the subject, he was encordingly. It is settled that in such a situa- titled to a patent for the tract (Svor v. Mortion the courts may not take up the adjudi- ris, 227 U. S. 524, 529, 530, 33 Sup. Ct. 385, cation of the pending claims, but must await 57 L. Ed. 623); but it does not enable him to the decision of the land officers and the issue complain on behalf of the United States or of patents in regular course. Michigan Land to assail the patent collaterally (Hoofnagle & Lumber Co. v. Rust, 168 U. S. 589, 592, v. Anderson, 7 Wheat. 212, 214, 215, 5 L. Ed. 594, 18 Sup. Ct. 208, 42 L. Ed. 591; Brown v. 437; Smelting Co. v. Kemp, 104 U. S. 636, Hitchcock, 73 U. S. 473, 19 Sup. Ct. 485, 43 647, 26 L. Ed. 875; Bohall v. Dilla, 114 U. S. L. Ed. 772; Cosmos Exploration Co. v. Gray 47, 51, 5 Sup. Ct. 782, 29 L. Ed. 61; Sparks v. Eagle Oil Co., 190 U. S. 301, 315, 23 Sup. Ct. Pierce, 115 U. S. 408, 6 Sup. Ct. 102, 29 L. Ed. 692, 24 Sup. Ct. 860, 47 L. Ed. 1064; Humbird 428; Fisher v. Rule, 248 U. S. 314, 318, 39 v. Avery, 195 U. S. 480, 502, 25 Sup. Ct. 123, Sup. Ct. 122, 63 L. Ed. 263). 49 L. Ed. 286. There is, however, a related jurisdiction which the courts may exercise pending the final action of those officers; they may protect a possession lawfully acquired or restore one wrongfully interrupted, for that is a matter which is not confided to the Land Department and may be dealt with

The Supreme Court of the state in its final opinion came nearer the views here expressed than did the trial court, but it assumed that the reconveyance by the railroad company to the United States was not accepted by the. latter and so was of no effect. In this the court was mistaken, for it affirmatively ap

*394

5. COURTS 347-FEDERAL COURT PRACTICE

-DENIALS.

pears not only that the land officers after the found that he was guilty of a breach of his reconveyance entertained the lieu selections common-law liability. of the same tracts, but also that they approved one of those selections and passed it to patent. Besides, the ultimate judgment entered by the court departs somewhat-possibly through a clerical inadvertence-from its final opinion.

The judgment must be reversed and the cause remanded for further proceedings not inconsistent with the views here expressed. Judgment reversed.

(39 Sup.Ct.)

(250 U. S. 504)

6. BANKS AND BANKING

254 BANKS-CONTINUATION IN OFFICE.

As Rev. St. § 5145 (Comp. St. § 9683), declares that directors shall hold office for one year and until their successors are elected and qualify, one who was elected and duly qualified as director of a national bank in 1910 must, in the absence of evidence that he resigned or refused to qualify when reelected in the following year, be treated as a director during the year 1911, in which the bank failed, where the only

BOWERMAN v. HAMNER.

(Argued April 28 and 29, 1919. Decided June 9, evidence as to his status was a letter bearing 1919.)

No. 289.

1. BANKS AND BANKING 253-NATIONAL BANKS-LIABILITY OF DIRECTORS.

Affirmative allegations of defense in an answer filed in an equity suit must be deemed denied, under equity rule 31 (198 Fed. xxvii, 115 C. C. A. xxvii).

While, in a suit for damages against national bank directors, based solely upon a violation of duty imposed by the National Bank Act, it is not enough to show a negligent violation of the act, but something more, in effect an intentional violation, must be shown to justify a recovery, yet the National Bank Act does not relieve directors from the common-law duty to diligently and honestly manage the affairs of the association.

NATIONAL

on mismanagement written by the director to the president after failure.

Mr. Justice McKenna and Mr. Justice McReynolds dissenting.

Appeal from the United States Circuit Court of Appeals for the Ninth Circuit.

Suit by Frank R. McCormick, as receiver of the First National Bank of Salmon, against Guy E. Bowerman and others. A decree for the named defendant was reversed by the Circuit Court of Appeals (McCormick v. King, 241 Fed. 737, 154 C. C. A. 439), and said defendant appeals; C. D. Hamner, who Succeeded Frank R. McCormick as receiver, being substituted in his stead. Affirmed. In a suit against national bank directors, a bill may be framed so as to charge, not only aards, both of Boise, Idaho, for appellant. *Messrs. Oliver O. Haga and James H. Richviolation of the duty imposed by the National Bank Act, but a violation of their common-law obligations.

2. BANKS AND BANKING 254-NATIONAL BANKS-LIABILITY OF DIRECTORS-BILL.

Mr. James M. Stevens, of Pocatello, Idaho, for appellee.

3. BANKS AND BANKING 253-NATIONAL BANKS-DIRECTORS-LIABILITY.

Where a director of a national bank resided some 200 miles distant from the site of the bank, and during the entire period of his directorate did not attend a directors' meeting or give any attention to the affairs of the bank, which were so mismanaged that failure resulted, he is liable for breach of his common-law duty to honestly and diligently administer the affairs of the bank, even though he cannot be held liable because the officers in charge made loans in excess of the limit imposed by Rev. St. § 5200 (Comp. St. § 9761).

4. APPEAL AND ERROR DETERMINATION.

Where a bank director construed a bill by the receiver as relying solely on a breach of statutory duty and declined to offer any evidence, held, that he must be charged with notice that in equity decision is subject to review on both law and facts, and in view of the hardship that it would work upon the receiver of the in

The bank was located in a small town in Idaho. It had a capital stock of only $25,000, which was increased in February, 1910, to $50,000, and it had a book surplus of $15,000 -$5,000 of which was improperly carried

solvent bank the director is not entitled to an opportunity to produce evidence on the question of his common-law liability, where the appellate to the surplus account in July, 1910, when court, on appeal from a decision in his favor, the capital was certainly impaired.

For other cases see same topic and KEY-NUMBER in all Key-Numbered Digests and Indexes

Mr. Justice CLARKE delivered the opinion of the Court.

This is a suit, commenced in the United States District Court for the District of Idaho, Eastern Division, by the receiver of the First National Bank of Salmon, against the former executive officers and directors of the bank, to obtain an accounting and decree for money lost by the alleged unlawful and negligent management of the affairs of the bank.

*

The sole appellant, Bowerman, was a direc1177(6)-REVIEW-tor, but not an executive officer of the bank, from its organization in January, 1906, until its failure in August, 1911, and, as owner of $10,000 of the capital stock, he was the largest stockholder but one.

*505

*506

*501

The evidence applicable to the allegations against Bowerman may be summarized as follows:

When the plaintiff rested, the appellant moved that the bill be dismissed as to him, announcing that he would not introduce any evidence in his own behalf, and at the conclusion of the trial the District Court granted his motion. On appeal the Circuit Court of Appeals reversed this judgment, found or special. The only justification or excuse Bowerman liable, and in the decree, which he offers for such conduct is that he lived we are reviewing, remanded the case to the about 200 miles from the town in which the District Court, with direction to enter a bank was located, and that communication decree in conformity with the views express- between the two places was difficult. ed in its opinion.

He was a director during the entire 51⁄2 years of the existence of the bank, but never attended a single directors' meeting, regular

In a letter, which is in evidence, written by him to the *president of the bank in 1911, after the failure, he refers to himself as "a nominal director," and says that, prompted by a published statement of the bank, which he had seen in 1910, he began writing to the president, warning him of the consequences if the "very hazardous manner of conducting the bank" was not changed, "various matters corrected, more of the notes collected, and the reserve kept up." In this letter he says that he had never been "consulted as to the management of the bank, its business transactions, or its policy," and that he had never received a statement of its condition, either the usual published statement or one for his personal use, without making request for it, and that in some cases he had been obliged to write several times before one was sent to him. The record, however, does not show that any communication of the kind described in this letter was ever written by him prior to the failure.

The only certified copies in evidence of the oath taken by Bowerman as a director are for the years beginning in January, 1909, and in January, 1910. They are in the form prescribed by statute, that the affiant will "diligently and honestly administer the affairs of the association, and that he will not knowingly violate or willingly permit to be violated any of the provisions" of the statutes of the United States under which the association was organized.

809*

The amended bill, on which the case was tried, is framed in fact, though not in form, in the alternative, averring, first, that the executive officers made, and that the directors negligently permitted them to make, three designated loans, each in excess of onetenth part of the paid-in and unimpaired capital stock and surplus of the bank, in violation of section 5200 of the Revised Statutes of the United States (Comp. St. § 9761). It then proceeds to allege: That, beginning with January, 1910, the affairs of the bank were grossly mismanaged by the executive officers, with the negligent permission of appellant and other directors; that of the three designated loans, on which large losses were sustained, the first was made to the Salmon Lumber Company, a corporation without financial resources to justify such a loan without security, and with its capital stock owned principally by members of the family of the president of the *bank; that the two other designated loans were negligently made to persons without financial standing and without security sufficient to justify the making of them; that overdrafts aggregating large amounts were permitted to be made by many persons, in violation of the by-laws of the association, and that a dividend on the capital stock was declared and paid in July, 1910, when the capital stock and surplus of the bank had been much impaired and its assets greatly depreciated. This gross mismanagement, it is averred, caused the failure of the bank and the loss for which recovery is prayed.

With respect to appellant, Bowerman, it is specifically alleged that, in disregard of his oath as a director to diligently and honestly administer the affairs of the bank, he negligently and willfully failed to attend a single meeting of the board of directors, to at any time examine, or cause to be examined, the books and papers of the bank, to ascertain its condition, or to in any manner inform himself as to the loans and overdrafts that were being made during the long period of mismanagement by the executive officers. It is alleged that the exercise by him as a director of a proper supervision of the affairs of the bank would have prevented the mismanagement complained of, and the loss which resulted from it.

The by-laws of the bank are in evidence, and they require "that regular meetings of the directors shall be held on the first Tuesday of each month"; that a "loans committee," to be composed of the president, cashier, and one director, shall make a report to each meeting of the board of directors of all bills, notes, and other evidences of debt discounted and purchased since its last previous report; that no officer or clerk shall pay any check drawn upon the bank, unless the drawer at the time of its presentation had sufficient funds on deposit to meet it; that a committee of three directors shall examine the affairs of the bank *every month, to see whether it is in sound and solvent condition, and to recommend changes which may seem desirable in the manner of doing business. In addition to these, there was a special by-law adopted on January 18, 1910, upon

Appellant's answer to the bill is substan- the suggestion of the Comptroller of the tially a general denial. Treasury, requiring that

*509

"The board of directors of the bank, shall, at each monthly meeting, or oftener, examine and approve all loans and discounts, and such approval shall be recorded in a book to be kept for that purpose."

(39 Sup.Ct.)

Some of these by-laws were flagrantly disobeyed for years before the failure, and the others were observed in a manner so perfunc-ly tory as to amount to a disobedience of them. The three large loans complained of were never reported to the board of directors, except fragmentarily from time to time, when indistinguishably incorporated with other overdrafts, although they were gradually accruing during many months.

When the bank failed its liabilities were $273,719.14 and its assets, nominally $325,624.12, from which, assuming that the stockholders' liability was not included in them (as to which the record is not clear), there was realized about $220,000, thus showing a shrinkage of approximately $100,000 in the resources of a bank with a capital and surplus of $60,000.

The District Court, with the full record before it, found the aggregate of the three excessive loans at the time the bank failed to be $35,700. Each of these loans was made up by allowing unsecured overdrafts to accumulate over a considerable period of time and then permitting them to be converted into unsecured notes.

[rule for measuring the responsibility of directors as to such violations, yet, it is expressly pointed out in the opinion of the court, that the act does not relieve such directors from the common-law duty to be honest and diligent, as is shown by the oath which they are required to take "to diligentand honestly administer the affairs of the association" as well as not "to knowingly violate or willingly permit the violation of any of the provisions of this title"-the National Bank Act (Act June 3, 1864, c. 106, 13 Stat. 99).

The National Bank Act imposes various specific duties on directors, other than those imposed by the common law, and it is obviously possible that a director may neglect one or more of the former, and not any of the latter, or vice versa. For example, in this case we have the gross negligence of the appellant, in failing to discharge his comWithout going more into the details, there mon-law duty to diligently administer the can be no doubt that the business of the affairs of the bank, made the basis for the bank was surrendered wholly to the presi- contention that he did not "knowingly" viodent and cashier, and was grossly mismanag-late his statutory duty by permitting the exed after January, 1910, in utter disregard cessive loans to be made. While the statute of the national banking laws and of the by- furnishes the exclusive rule for determinlaws of the association, and that this mis- ing whether its provisions have been violated management was of such a character that or not, this does not prevent the application even slight care in the discharge of his du of the common-law rule for measuring violaties as a director must have led Bowerman, tions of common-law duties. And there is an experienced banker, to discover the trend no sound reason why a bill may not be so of the management and to have prevented framed that, if the evidence fails to establish the greater part, if not all, of the losses statutory negligence, but establishes commonwhich resulted in the failure. law negligence, a decree may be entered accordingly, and thus the necessity for a resort to a second suit avoided.

The bill in this case is given, as we have seen, this broader scope, and contains the charge of statutory as well as common-law negligence on appellant's part, resulting in the loss complained of. Such pleading was accepted as proper practice in Briggs v. Spaulding, 141 U. S. 132, 142, 165, 11 Sup. Ct. 924, 927 (35 L. Ed. 662) in which a bill thus "framed upon the theory of a breach by the defendants as directors of their common-law duties as trustees of a financial corporation and of breaches of special restrictions and obligations of the national banking act" was under consideration by this court, and, upon a full review of the decisions, the rule for determining the common-law liability of directors of such banks was twice stated, once on page 152 of 141 U. S., on page 931 of 11 Sup. Ct. (35 L. Ed. 662):

[1-3] The appellant relies chiefly upon the assignment of error that there is no evidence in the record to show that he knowingly consented to the making of the three loans in excess of the limit imposed by R. S. § 5200 (Comp. St. § 9761), and therefore he argues that under the rule prescribed in Yates v. Jones National Bank, 206 U. S. 158, 27 Sup. Ct. 638, 51 L. Ed. 1002; and Jones National Bank v. Yates, 240 U. S. 542, 36 Sup. Ct. 429, 60 L. Ed. 788; the decree of the Circuit Court of Appeals holding him liable is erroneous and should be reversed.

While the cited cases hold that, in a suit for damages against national bank directors, based solely upon a violation of duty imposed by the National Bank Act, it is not enough to show a negligent violation of the act, but that something more, in effect an intentional violation, must be shown to justify a recovery, and that this is the exclusive

The rule thus announced would perhaps be applicable if the bill were limited to the charge of liability based solely upon the statutory prohibition of excessive loans, for it is reasonably clear that Bowerman did not have actual knowledge of the making of the loans, or of anything else connected with the conduct of the bank. He deliberately avoided acquiring knowledge of its affairs and *wholly abdicated the duty of supervision and control which rested upon him as a director.

+512

of the bank, or a reasonable control and

"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, supervision over its affairs and officers, is and the question of negligence is, therefore, ulti-likewise beyond discussion. He cannot be mately a question of fact, to be determined shielded from liability because of want of under all the circumstances." knowledge of wrongdoing on his part, since tention in the discharge of his voluntarily asthat ignorance was the result of gross inatsumed and sworn duty.

And again, in the final summing up, on page 165 of 141 U. S., on page 935 of 11 Sup. Ct. (35 L. Ed. 662):

Bowerman was a banker, and the letter, from which we have quoted, written to the

so understood the business of banking, and what was necessary for the safe conduct of it, that even slight care on his part in the discharge of his duty as a director must have discovered and arrested what he himself characterized as a hazardous manner of conducting its affairs. He was a man of such

"Without reviewing the various decisions on the subject, we hold that the directors must ex-president of the bank which failed, shows he ercise ordinary care and prudence in the administration of the affairs of a bank, and that this includes something more than officiating as figureheads. They are 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 knowl-importance and reputation that the use of edge of wrongdoing, if that ignorance is the his name must have contributed to securing result of gross inattention." the confidence of the community and of *depositors for the bank, and it would be a reproach to the law to permit his residence at a distance from the location of the bank, a condition which existed from the time he first assumed the office of director, to serve as an excuse for his utter abdication of his common-law responsibility for the conduct of its affairs and for the flagrant violation of his oath of office when it resulted in loss to others.

In an earlier case, Martin v. Webb, 110 U. S. 7, 15, 3 Sup. Ct. 428, 433 (28 L. Ed. 49) it was said:

affairs of the bank, is equally clear; and that Bowerman, when guilty of neglect in both of these respects, did not exercise the diligence which prudent men would usually exercise in ascertaining the condition of the business

"Directors cannot, in justice to those who deal with the bank, shut their eyes to what is going on around them. It is their duty to use ordinary diligence in ascertaining the condition of its business and to exercise reasonable control and supervision of its officers. They have something more to do than from time to time, to elect officers of the bank, and to make declaration of dividends. That which they ought, by [4] It is argued that the decree of the Cirproper diligence, to have known as to the gener-cuit Court of Appeals should be reversed, and al course of business in the bank, they may be the cause remanded for a new trial for the presumed to have known in any contest between reason that the trial in the District Court the corporation and those who are justified by was on the theory that only the charge of the circumstances in dealing with its officers statutory liability was involved and to be upon the basis of that course of business." met by the appellant, and that he should have an opportunity to produce evidence, if he desires, on the issue of common-law liability.

At his peril the appellant put the construction on the pleadings which, for the reasons stated in this opinion, was erroneous. The suit was in equity, and he was charged with notice that the decision of the trial court was subject to review on both the law and the facts, and, although he was present in court during the trial, he neither took the stand to testify in his own behalf nor offered any evidence upon the question of his liability. The interests represented by the receiver are entitled to consideration, as well as those of the appellant, and the contention cannot be allowed.

That ordinarily prudent and diligent men, accepting election to membership in a bank directorate, would not willfully absent themselves from directors' meetings for years together, as Bowerman did, cannot be doubted; that a director who never makes, or causes to be made, any examination whatever of the books or papers of the bank to determine its condition, and the way in which it is being conducted, does not exercise ordinary care and prudence in the management of the The only showing on this subject in the

[5, 6] It is also urged that the appellant resigned his office as director some time before the bank failed, and that the decree of the Circuit Court of Appeals renders him liable for transactions after his resignation.

This latter statement of the rule is made in a case dealing only with borrowers from the bank, but there is no good reason why it should not be applied for the protection of depositors and stockholders.

While the rule as thus formulated in Briggs v. Spaulding, supra, has been thought by some state courts of last resort to be an understatement of the law of the duty of bank directors, it is amply broad, without restatement, for the disposition of the case before us.