out anything, except in case of one book-the individual ledgerwhich contained the accounts of the individual depositors; but by the rules of the bank and of most of the other banks in the city, directors were not allowed to inspect this book. Keeping in mind that the rule in Pennsylvania is that the degree of care the directors are required to exercise is such ordinary care as is exercised by directors of corporations in the same line of business, rather than the care that a person takes of his own affairs, the court, in a very able opinion, held that the directors were not guilty of gross negligence in not examining the individual ledger and were not liable. Summing up, Chief Justice Paxson said: "Nor do we think the directors were bound to regard the statements submitted to them as false, and the president, cashier and clerks as thieves. They had nothing to arouse suspicion. All of these gentlemen stood high. They were the trusted agents of the corporation, paid for their services, and regarded in the community in which they lived as honest men. Aside from this, the directors were among the heaviest stockholders of the bank. They did not desert the ship like a parcel of drowning rats, but imperiled their private fortunes in an effort to keep it afloat. Under such circumstances, it would be an act of gross injustice to hold them liable for the frauds of others, in which they had not participated, of which they had no knowledge, and which have only been brought to light with the aid of experts."47

In a late federal case, bank directors were held liable for thefts of a paying teller where they made only two examinations of the bank during the six years which the thefts covered. In holding them liable, the court also held that in making the examination, there was negligence in not examining the depositors' ledger to see whether the balance due depositors compared with the balance as shown on the cashier's ledger; that the fact that the bank funds were diminishing at an unprecedent rate while the number of depositors were not falling off and the daily deposits were in fact increasing, should have put the directors upon inquiry; and that the fact that the national bank examiners examined the bank twice a year was no excuse, where the directors knew how brief and superficial such an examination is.48

§ 2489. Briggs v. Spaulding. The case most often cited, at least in support of holdings exonerating directors from liability, was de48 Bates v. Dresser, 229 Fed. 772.

46 See § 2451, supra.

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

cided by the Supreme Court of the United States in 1890 by a vote of five to four. The majority opinion was written by Chief Justice Fuller while Mr. Justice Harlan delivered the dissenting opinion. While the case involved a national bank, the reasoning pro and con is applicable to directors of other corporations. The directors were all held not liable, on one ground or another, some of the reasons applying only to particular directors, for losses due to mismanagement by the executive officers of the bank, where the directors had failed to make an investigation of the books of the bank and its condition within ninety days after they became directors. The chief executive officer was reputed to be trustworthy and owned most of the stock and it was generally believed that the bank was in a sound and prosperous condition. The bank became bankrupt ninety days after the directors were elected. For fourteen years prior to the failure, the business of the bank had been conducted by the president, and for many years no investigating committees had been appointed by the board and no investigations or examinations of the bank made, and the meetings of the board were infrequent and perfunctory. The facts were that the manager and principal stockholder of the bank whose misconduct in making loans wrecked the bank, induced several of the directors to become such, and they paid no attention to the business of the bank except to inquire of him from time to time as to how the business was going. One of the directors obtained a year's leave of absence shortly after his election, another became physically unable to attend to business, and another who was an experienced bank man expected to act merely in an advisory capacity. It was contended that the directors should have insisted upon meetings of the board or had special meetings called, and at those meetings or otherwise, made personal examination into the affairs of the bank, and that if they had done so they

49 Briggs v. Spaulding, 141 U. S. 132, 35 L. Ed. 662.

For review of this case, see Robinson v. Hall, 63 Fed. 222, 226, and see article in 17 Yale Law Journal 33.

The

"The rule of duty and liability declared in Briggs v. Spaulding has been reluctantly followed by the lower federal courts in subsequent cases. remarks on several occasions clearly reveal that their real opinion was quite different from that which they were required to adopt and apply. Re

membering, therefore, that four of the nine judges who decided the case entertained a different view, that most of the federal judges in subsequent cases have followed it from necessity and not from conviction of its soundness, that with very few exceptions it has encountered the disapproval of the state tribunals, is it unreasonable to suppose that the question would receive the same answer should it ever be reviewed?" 1 Bolles, Modern Law of Banking, p. 293.

would have discovered the condition of the bank and prevented the subsequent losses. The prevailing opinion, while expressly stating that directors are not absolved from the duty of reasonable supervision by committing the conduct of the business to executive officers, held that the directors were not liable on the theory that in the short time of ninety days they were not guilty of negligence, in the absence of anything to excite suspicion, in not ordering a thorough examination of the affairs of the bank. The dissenting opinion, which has been favorably commented on by several leading textbook writers, undoubtedly represents the trend of the later decisions of the state courts, and well sums up the situation in the case at bar as follows: "In fact, those gentlemen, while they were directors, had no knowledge whatever of what was being done by Lee in the conduct of the bank. They took his word that all was right, and gave no attention whatever to the management of its business. Their eyes were as completely closed to what he did, from day to day, in directing the affairs of the bank, as if they had deliberately determined not to see and not to know how he controlled its business." In short the whole case, so far as the difference of opinion among the judges is concerned, may be summed up as follows: the majority held that the duty of reasonable supervision existed but that such duty had not been breached; the minority held. that such duty not only existed but in the case at bar had been neglected.

This case has been quoted and referred to more than any other decision on this question. It has been distinguished in decisions of lower federal courts and it has been criticised by some of the state courts. It is difficult to attack it for the reason that it lays down fair rules and then proceeds to look at the whole matter from the viewpoint of the individual directors. To one director, it says that he should not be liable because he was granted a year's leave of absence; to another, that it would be wrong to hold you liable because your wife became very sick and the extra strain on you incapacitated you physically and mentally from properly attending to business; to another, you should not be held liable because you were over seventy years of age and had retired from business and because it was understood that you were to be not an active but merely an advisory director. From the viewpoint of the directors, all this sounds reasonable. But from the viewpoint of the stockholders there is much to be said against the reasons for excusing the individual directors. And when the. dissenting opinion of Mr. Justice Harlan is read, the majority of unprejudiced minds will, it is submitted, agree with his conclusion

that "the proof is clear and convincing that a considerable part of the amount lost to the bank, and therefore to its stockholders and depositors, could have been saved, if they had exercised such care in the supervision and management of the bank's business as men of ordinary diligence exercise in respect to their own business."'

§ 2490. Campbell v. Watson. The case of Campbell v: Watson was decided by the Court of Chancery of New Jersey in 1901.50 The opinion was written by Vice Chancellor Pitney, now one of the justices of the Supreme Court of the United States. It is submitted that the decision represents what may be said to be the growing tendency of the courts to hold directors liable for acts of executive officers, in a proper case, instead of using high sounding and flowery language in announcing the responsible duties and grave liabilities of directors and then exonerating them from liability because they did not actually participate in, or have actual knowledge of, the misdeeds of the executive officer. The opinion can almost be said to be a textbook in itself on this important branch of the law, and its review of the authorities is extensive and thorough. While it relates to the liabilities of bank directors, much that is said is equally applicable to directors of other corporations. To quote at length all of the material statements of the opinion would be a waste of time and space. However, a few of the rules laid down, especially applicable to this branch of the law, will be briefly noticed and stated, viz. :

1. The language used by the courts "must, in all cases, be construed in the light of the facts of the particular case."

2. What was not negligence in supervision in the early days of banking may be negligence now, owing to the new manifestations. of ingenuity on the part of bank thieves.51

3. " "So numerous have been the defalcations and dishonest abstractions of money by employees of high grade, who had by years of right living and acting earned the confidence of their employers that it has become well-nigh a maxim with such institutions to, so to speak, trust nobody beyond what is necessary to the practical busi

50 62 N. J. Eq. 396, 50 Atl. 120. 51 Since "experience has developed modes of theft by such employees [of banks] unknown and unthought of half a century ago, and these manifestations of ingenuity on the part of the thieves has been met by new

safeguards on the part of the directors," therefore "what years ago would have been considered due diligence cannot be so considered today." Campbell v. Watson, 62 N. J. Eq. 396, 50 Atl. 120.

ness of the bank, and to subject the work of each one, from the highest to the lowest, to periodical investigation."

4. Directors of banks are bound "to acquaint themselves with the extent and mode of supervision exercised by officers of well-conducted banking institutions in the neighborhood," and the fact that a bank is a small country bank does not relieve its directors "from adopting the same practical measures for protection against frauds and thefts as were in use by its greater neighbors in the larger towns."

5. That by the common law of the land and the usages of banks, independently of a by-law providing therefor, the duty of the directors included the occasional examination of accounts of the officers, especially where such examinations by committees have been a part of the routine duties of boards of directors of all banks in the vicinity for many years.

6. That "if a man feels that he has not had sufficient business experience to qualify him to perform the duties of a director, he should either acquire the knowledge by inquiry, or refuse to act."

7. That the directors have no right to rely exclusively on examinations made by state examiners once in one or two years, at least where a by-law requires examinations by the board.

8. That a charter provision requiring the publication in newspapers of quarterly statements showing the "actual condition" of the bank requires something more than a showing of the condition as shown. by the books of the bank, i. e., that it is the duty of the directors to use reasonable means of knowing that the statements so published are reasonably accurate and reliable.

9. That ignorance of a by-law requiring examinations of the books is no excuse.

10. That the duty of examination is not excused on the theory that it requires a director to be an expert bookkeeper as well as a spy and detective, since the examination is an open one and it did not, in the present case, require an expert.

11. That directors are bound only to exercise "such care and diligence in looking over his [cashier's] work as experience has shown is at once proper as well as practicable, and as is exercised by other experienced directors, and as is required by their charter and bylaws."

12. Depositors in banks ordinarily occupy the position of creditors of the bank, but in savings banks, in some states, where there are not stockholders, the relations existing between the directors and the depositors are, so far as the duties and liabilities to the depositors