§ 2479. Isolated acts as distinguished from continuous misconduct. Of course, if negligent or wrongful acts of officers are merely isolated acts then it might well be that the directors would not be chargeable with notice thereof, but if the wrongful acts are part of a system which has long been practiced by the wrongdoer, the presumption is that the directors, ordinarily, would have discovered the wrongdoing if they had been reasonably diligent.25

§ 2480. What constitutes negligence-In general. It is not actionable negligence for the directors to permit the same person to be both cashier and bookkeeper.26

Failure of bank directors to make certain examinations required by statute every six months, with the result that the negligence or misfeasance of other officers of the corporation was not discovered, where it would have been discovered if the examination had been made, is culpable negligence.27

§ 2481. Failure to take bond. The negligence may consist in the failure to take a bond from the erring officer.28 However, if the taking of an official bond of executive officers in favor of the corporation is discretionary with the board of directors, it has been held that the omission of the directors to take a bond of a bank cashier of good repute and character and of some visible property does not render them personally liable for losses caused by his misconduct.29

§ 2482. Lack of system. In the case of savings banks, it is held that "the omission to make use of an ordinary and approved precaution against the known risks of the business is, in the absence of any substitute for such omitted precaution, prima facie evidence of a want of reasonable care"; and, in a particular case, where the custom of savings banks was shown to be to require the treasurer to take trial balances off the depositors' ledgers from time to time, the directors were held liable where this was not required and the treasurer was a defaulter for many years.30.

25 Williams v. McKay, 40 N. J. Eq. ing, 11 La. 41, 30 Am. Dec. 708; Vance 189, 53 Am. Rep. 775. v. Phoenix Ins. Co., 4 Lea (Tenn.) 385.

26 Savings Bank of Louisville's Assignee v. Caperton, 87 Ky. 306, 320, 12 Am. St. Rep. 488, 8 S. W. 885.

27 Green v. Officers & Directors of Knoxville Banking & Trust Co., 133 Tenn. 609, 182 S. W. 244.

28 Pontchartrain R. Co. v. Pauld

IV Priv. Corp.-24

29 Robinson v. Hall, 59 Fed. 648, 651, rev'd on other grounds 63 Fed.

222.

30 Lippitt v. Ashley, 89 Conn. 451, 94 Atl. 995.

"This duty of supervision," said Justice Beach in a recent Connecticut case, where a savings bank was involved, "is not performed by reposing confidence" in custodians of their funds, "however worthy of confidence they may seem to be. The history of the business, known to every bank director, shows that confidence without supervision has often proved to be a temptation and an opportunity. We do not mean to say that directors are required to proceed on the theory that their officers are under suspicion, or to examine the books themselves, or to employ expert accountants specially commissioned to detect possible defalcations. Until something happens which is calculated to put reasonably prudent bank directors on inquiry, they are entitled to assume that their officers, if selected with reasonable care, are honest.. Yet there is a proper field for oversight and supervision of books and accounts within these limits, and for the purposes of this case it is sufficient to say that bank directors are bound to see that an approved system of bookkeeping is adopted, which will tend to furnish some protection to the bank against mistakes and false entries; and that they are bound to exercise reasonable care in seeing that the bank gets the benefit of the protection which such a system of bookkeeping purports to give." 31

So it has been held that "a system of doing business which ignores a factor which, by statute, ought to be part of that system is prima facie a defective and negligent system, and if loss can be shown to have resulted from it, then I think a case of misfeasance would be made out." 32

§ 2483.-Absence on vacation. It has been held that a member of the executive committee of a trust company is not negligent in taking a summer vacation of two months and a half where there were sufficient members of the committee within reach to constitute a quorum during his absence, and the condition of the company appeared sound when he left.33

§ 2484. Matters putting directors upon inquiry. Of course, if a director acquires knowledge which tends to raise a suspicion against executive officers or agents, in connection with their positions, he must follow it up or inform the other directors. Thus, a director

31 Lippitt v. Ashley, 89 Conn. 451, 94 Atl. 995.

32 Re Dominion Trust Co., 32 Dom. L. R. (Can.) 63, 65, modifying 26 Dom. L. R. 408.

33 Kavanaugh v. Gould, 147 N. Y. App. Div. 281, 302, 131 N. Y. Supp. 1059.

of a bank is negligent where he fails to report to his co-directors a letter written to him as president of the company in regard to the theft of a package of money, belonging to the writer, from the bank, and a subsequent conversation in which the writer told him there was a thief in the bank and to look after a certain paying teller who was stated to be living at a fast pace; and where an investigation of the teller at that time would have resulted in a discovery of his thefts, such director is responsible for his subsequent defalcations.34 So a director of a bank, told by the president of the bank which was negotiating for the purchase of the first bank, that a possible cause for the great decrease of deposits in the first bank was a current report that one of the bank officers was frequenting bucket shops and living pretty fast, is responsible for defalcations by such officer after the lapse of what would be a reasonable time for investigating such officer, where no such investigation was made but if it had been made past thefts would have been disclosed.35 Similarly where a bank has been paying dividends for years, the fact that a dividend is twice passed by the officers in charge, without explanation, should put the directors upon inquiry as to the reason why.36

§ 2485. Negligence in appointment of untrustworthy or incompetent officer. This form of negligence rarely occurs. Generally the defaulting officer has always been deemed trustworthy by all the directors, and there is no question as to his competency. However, there is no question but that the directors may be personally liable where their appointee is untrustworthy or incompetent, and the directors were negligent in making the appointment.37 But the mere fact that directors of a bank employ as a cashier one who was known by them to have lost some few thousand dollars in stock speculations some four years before his election as cashier, does not necessarily make them liable for his subsequent defalcations.38

Re-employment by the board of directors of one known to be dishonest, in a responsible position, making possible a subsequent theft of a large sum, renders the directors personally liable.39

34 Bates v. Dresser, 229 Fed. 772, 797.

35 Bates v. Dresser, 229 Fed. 772, 797.

36 Gibbons v. Anderson, 80 Fed. 345, 351.

37 See Scott v. Depeyster, 1 Edw. Ch. (N. Y.) 513.

38 Ricker v. Hall, 69 N. H. 592, 45 Atl. 556.

39 Loan Soc. of Philadelphia V. Eavenson, 248 Pa. 407, 94 Atl. 121.

§ 2486. Liability as terminated by going out of office. It need hardly be said that one cannot be held liable as a director for wrongs of other corporate officers or agents after he has ceased to sustain the relation of director to the corporation.40

§ 2487. Statutes as affecting liability. In California, a special statute expressly makes directors personally liable for misappropriation of corporate funds by corporate officers. Such statute is penal in its character and therefore subject to strict construction.11

In Washington, the statute relating to mercantile corporations provides that the members thereof shall be "subject to all the conditions and liabilities herein imposed, and to none others." There is no provision in the statute making directors or trustees liable for the acts of the president or manager of the corporation. It was held that trustees cannot be held liable for fraud perpetrated on a third person by the president and general manager of the corporation, but only for acts done by the trustees or in which they participated.42

§ 2488. Particular leading cases-In general. The leading cases in this country on this subject are worthy of careful study, for the reason that they are so often cited and the facts of the particular case are of such great importance. For clearness, ability and evidence of careful research, attention is called to the cases cited below which embrace most of what may be called the leading cases on this question.43

So far as banks are concerned, the duties of directors, in order

40 Briggs v. Spaulding, 141 U. S. 132, 152-154, 35 L. Ed. 662, holding that there was no liability after resignation; Brown v. Clow, 158 Ind. 403, 62 N. E. 1006.

41 Winchester v. Howard, 136 Cal. 432, 89 Am. St. Rep. 153, 69 Pac. 77, 64 Pac. 692.

42 Northern Codfish Co. v. Stiberg, 96 Wash. 126, 164 Pac. 750.

43 United States. Briggs v. Spaulding, 141 U. S. 132, 35 L. Ed. 662.

Connecticut. Lippitt v. Ashley, 89 Conn. 451, 94 Atl. 995; Lowndes v. City Nat. Bank of South Norwalk, 82 Conn. 8, 22 L. R. A. (N. S.) 408, 72 Atl. 150.

Illinois. Wallach v. Billings, 277 Ill. 218, 115 N. E. 382.

Indiana. Coddington v. Canaday, 157 Ind. 243, 61 N. E. 567.

Kentucky. Savings Bank of Louisville's Assignee v. Caperton, 87 Ky. 306, 12 Am. St. Rep. 488, 8 S. W. 885. New Jersey. Campbell v. Watson, 62 N. J. Eq. 396, 50 Atl. 120.

New York. Hun v. Cary, 82 N. Y. 65, 37 Am. Rep. 546; Kavanaugh v. Gould, 147 App. Div. 281, 131 N. Y. Supp. 1059.

Pennsylvania. Swentzel V. Penn Bank, 147 Pa. St. 140, 15 L. R. A. 305, 30 Am. St. Rep. 718, 23 Atl. 405.

Utah. Warren v. Robison, 19 Utah

to avoid liability for the misconduct of the cashier or other executive officers, has been well stated by the Utah Supreme Court as follows: "While such directors are not required to watch the ordinary routine of business, or observe the exact state of each day's accounts, still they are bound to possess a general knowledge of the manner in which the business is transacted, and of the character of the transactions, and to maintain such a degree of vigilance over, and intimacy with, the business as will enable them to know to whom, and upon what security, the large lines of credit are given. Especially is this so as to large loans and discounts, or matters at once affecting the stability and prosperity of the bank, and the safety of depositors." 44

The Supreme Court of Indiana, speaking through Justice Dowling, after enumerating the statutory and other duties of directors of a bank, sums up as follows: "The supervision of the directors over the business of the bank should have been such as would have enabled them at all times to know it's general financial condition, and to check or prevent improvident or dishonest conduct by the president or cashier. They had the means of knowing, and they were bound to know the amount and value of the paper and securities held by the bank. They were also bound to know the character and habits of the men they had placed and kept in charge of the bank as its president and cashier. There could be no excuse for their failure to examine the books of the bank, and for their ignorance of the manner in which its business was conducted." 45

In a leading case in Pennsylvania, directors of a bank were sought to be held liable for amounts abstracted from the bank by the president and lost in speculations, on the ground that the directors ought to have known of the speculations. The speculation with the funds. of the bank was done with the knowledge of the cashier and the co-operation of one or more clerks or subordinates, but it was not claimed that the directors actually knew of the wrongful acts. False entries were made in the books, and false accounts or accounts with fictitious persons were opened so as to hide the theft. However, if the directors had inspected the books they would not have found.

289, 75 Am. St. Rep. 734, 57 Pac. 287, a study of which is especially recommended.

Virginia. Marshall v. Farmers' & Mechanics' Sav. Bank of Alexander, 85 Va. 676, 2 L. R. A. 534, 17 Am. St. Rep. 84, 8 S. E. 586.

44 Warren v. Robison, 19 Utah 289, 299, 75 Am. St. Rep. 734, 57 Pac. 287. This is a leading case which discusses the liability of officers at considerable length and with much ability.

45 Coddington v. Canaday, 157 Ind. 243, 61 N. E. 567.