Michelsen v. Penney

AUGUSTUS N. HAND, Circuit Judge

(dissenting in part).

The opinion of the majority imposes a liability of $28,545.65 for losses on loans made while City National Bank was deficient in its reserve balance in the Federal Reserve Bank. See 12 U.S.C. § 464 , 38 Stat. 270 , 271. The proviso of Section 464 prohibited the making of new loans while the reserve was impaired. The objects of requiring the maintenance of the reserve were to furnish funds to enable the *436 Federal Reserve Banks to conduct their business and likewise to ensure the maintenance of available cash capital for the benefit of the member banks. It also may be, as is suggested in the majority opinion, a “brake” on over-expansion of credit furnished by the banks in times of business inflation. Whichever of the above reasons for the proviso be adopted, or whether all of them be deemed applicable, I can see no justification for imposing liability for the loss of $28,545.65 and interest since no causal relation is shown between the loss incurred upon the loans here in question and the purpose of the statute. It is true that “but for” the violation of the statute the loans would not have been made and hence the losses would not have been incurred, but it is equally true that the losses would have been incurred had the loans been made at times when there was no deficiency in the reserve account. Therefore the ordinary rule should be applied, that where no negligence in making the loans is established, and no relation has been shown between the loss and the failure to meet the statutory requirement, there is no liability. 2 Restatement Torts (1934) §§ 286, 431 (a); Klinkenstein v. Third Avenue Ry., 246 N.Y. 327 , 158 N.E. 886 , 54 A.L.R. 369 ; Corbett v. Scott, 243 N.Y. 66 , 152 N.E. 467 , 46 A.L.R. 1064 . This general rule has been applied in a multitude of instances of statutory violations. The operator of an automobile who has no license, though acting in violation of a statute designed to protect travelers on the highway, is usually held to be neither precluded from recovery for injuries he may sustain nor liable in damages for running over a pedestrian or colliding with another automobile, unless he be negligent in some respect causally related to the harm. Dervin v. Frenier, 91 Vt. 398 , 100 A. 760 ; Atlantic Coast Line R. Co. v. Weir, 63 Fla. 69 , 58 So. 641 , 41 L.R.A.,N.S., 307, Ann.Cas. 1914A, 126; Clark v. Doolittle, 205 App.Div. 697 , 199 N.Y.S. 814 ; Hyde v. McCreery, 145 App.Div. 729 , 130 N.Y.S. 269 . The present tendency of the courts is to hold the rule requiring a causal connection equally applicable in the case of trustees’ breaches of trust, with the qualification that a trustee who places himself in a position to profit personally by his breach is liable for a “but for” consequence which would have been just as likely to occur had there been no breach. 2 Scott, Trusts § 205.1; Darlington’s Estate, 245 Pa. 212 , 91 A. 486 ; People’s State Bank v. Wade, 269 Ky. 89 , 106 S.W.2d 74 ; Note, 50 Harv.L.Rev. 317.

A situation which might bring this principle into clearer light would be one where a bank made a loan while reserves were deficient and one of its employees obtained the note by stealth, sold it and embezzled the proceeds. Had the loan not been made, there would have been no loss, but it seems inconceivable that an absolute liability would be imposed on the directors on the theory that the reserves were deficient. Cf. Darlington’s Estate, 245 Pa. 212 , 91 A. 486 .

It is to be added that the decisions by Judge Francis C. Lowell in Allen v. Luke, C.C.Mass., 163 F. 1018 , and by the Sixth Circuit Court of Appeals in Holman v. Cross, March 7, 1935, 75 F.2d 909 , were followed by substantial reenactment of the statute, or important amendments to it, without any attempt to change the rule laid down in those cases. Compare R.S. § 5191, 12 U.S.C.A. §§ 141-143 , with 38 Stat. 271 (1913), 12 U.S.C.A. § 464 . See 49 Stat. 706 , (August 23, 1935), amending Federal Reserve Act, Section 19, 12 U.S.C.A. § 462b. This is an indication that the judicial interpretation of its effect met the approval of Congress. Indeed, Allen v. Luke, supra, was decided before the passage of the Federal Reserve Act, which was the occasion of a very full review of the banking laws, upon which Congress must have carefully considered the existing judicial interpretation of the provisions of the earlier acts which it carried into the Federal Reserve Act.

The directors of this bank are not claimed to have profited personally from this breach of statute, nor is it contended that the decision not to suspend the loaning function of the bank was inimical to its best interests. An inability to make loans could only have so far impaired public confidence in the institution as to have forced its early liquidation, and if the responsible public authorities had thought liquidation a desirable course, they could have forced it under Sections 93 and 191, 12 U.S.C.A. A rule which gives a bank’s directors the choice of guaranteeing all the loans it may make, or adopting a course apparently regarded as undesirable for the bank, is a rule not to be sanctioned in the absence of a clear statutory mandate, particularly when the statute as it has hitherto been judicially construed gave the directors no warning *437 of the choice they were making. It is reasonable to suppose that bank directors have relied upon this construction as protecting them from personal liability in making loans that were in themselves safe. They ought not to be held because of a depreciation in the reserves, unless a lack of available cash can be shown to have been the occasion of losses.

Liability for violation of the statute limiting individual loans to ten per cent of the bank’s capital and surplus has been imposed in cases of resulting loss. 12 U.S.C.A. § 84 ; Corsicana National Bank v. Johnson, 251 U.S. 68 , 40 S.Ct. 82 , 64 L.Ed. 141 . The imposition of liability in such cases is entirely consistent with the general principle requiring a causal relation between the violation and the loss. Had the excessive loan been limited to the statutory amount, the loss would certainly not have been so great; nor should it be assumed that the borrower would have accepted the smaller loan at all. See Corsicana National Bank v. Johnson, supra, 251 U.S. at 87 , 40 S.Ct. 82 , 64 L.Ed. 141 . But cf. 1 Restatement, Trusts (1935) § 229, comment b. Section 84 attempts to establish a rule of prudent management and to protect the bank against placing too large a portion of its funds at the risk of a single borrower. In other words, it lays down a rule of due care in making loans, not in maintaining reserves, and the disregard of it is the foundation of what is really liability for negligence, if loss results.

Title 12 U.S.C.A. § 93 , prescribes a penalty for violation of the clause against making loans while reserves are deficient, which is and has for many years been a liability to forfeiture of the bank’s franchise. It adds a personal liability of the directors “for all damages * * * sustained in consequence of such violation.” These are the only sanctions provided by law and they should not be extended by implication so as to impose a personal liability in cases where the loss is not attributed to negligence. A long-settled judicial construction to the contrary as well as familiar rules of statutory liability in my opinion support this view and a contrary result, I think, tends to disappoint well-founded expectations.

I concur in the opinion of Judge Clark except as to Claim 6 in respect of which I think no liability should be imposed.