Michelsen v. Penney

FRANK, Circuit Judge

(dissenting in part).

Judge HAND, in his dissenting opinion, disagrees with Judge CLARK’S opinion on one point; as to that point, I agree with Judge CLARK.

Judge HAND joins in Judge CLARK’S opinion which is thus the majority opinion on another point as to which I disagree— the rejection of plaintiffs’ contention that the defendant is liable for non-negligent acts of those persons who were elected as directors but none of whom ever owned “in his own right” $1,000 of the bank’s stock and each of whom, therefore, in purporting to act as a director, violated 12 U.S.C.A. § 72 which provides: “Every director must during his whole term of service, be a citizen of the United States, and at least three-fourths of the directors must have resided in the State, Territory, or District in which the association is located, or within fifty miles of the location of the office of the association, for at least one year immediately preceding their election, and must be residents of such State or within a fifty-mile territory of the location of the association during their continuance in office. Every director must own in his own right shares of the capital stock of the association of which he is a director the aggregate par value of which shall not be less than $1,000, unless the capital of the bank shall not exceed $25,000 in which case he must own in his own right shares of such capital stock the aggregate par value of which shall not be less than $500. Any director who ceases to be the owner of the required number of shares of the stock, or who becomes in any other manner disqualified, shall thereby vacate his place.”

It seems to be conceded by defendant and by my colleagues, that, since defendant is responsible for the fact that those persons who, although elected as directors, violated these provisions, defendant should be held liable to the same extent as those persons would have been, if they had been sued. Accordingly, I shall consider the case as if they had been sued, and discuss what, in that event, would have been their liability.

1. I think that each of those persons, if sued, should have been liable for net losses resulting from any acts authorized at any meeting which he attended, regardless of whether such authorizations were or were not negligent, i. e., did or did not involve the exercise of reasonable judgment. His liability, I think, is different from that of a director who complied with *438 § 72 and who thereby became a lawfully qualified director; the liability of such a qualified director is, I think, correctly set forth in the foregoing opinion of the majority of this court.

The defendant argues, and my colleagues agree, that those persons who were elected as directors but who did not comply with § 72 were de facto directors, and that a de facto director’s liability is precisely the same as that of a de jure director. That those persons were de facto directors there can be little doubt; and that a de facto director is liable at least to the same extent as a de jure director would seem to go without saying.

2. The sole question is whether his liability is greater. Since that question is not discussed in the cases, it seems appropriate to turn to decisions relating to de facto public officers. 1 There the well-settled rule is that the de facto doctrine is exclusively for the benefit of persons who have in good faith relied upon the acts of the de facto officer, and not at all for the benefit of the de facto officer himself. 2 An alien who is elected to the office of sheriff, when the statute provides that only a citizen may be a sheriff, if nevertheless he purports to exercise the powers of that office, is but a de facto, not a de jure, sheriff. If, acting under a valid writ, he levies on and sells property, the defect in his title to his office is not permitted adversely to affect the execution creditor or the purchaser at the execution sale; an attack on the officer’s title to his office is, in such cases, a “collateral” attack and is precluded by the de facto doctrine. But where the de facto officer is himself sued by the debtor — so that the attack is “direct” — then the de facto doctrine becomes inoperative; thus, if a sheriff, acting under a valid writ, enters on land or arrests a person, and is then sued for trespass or assault, he can justify by showing that he is a de jure officer and that his conduct was authorized by statute conferring power, upon one holding the office of sheriff, to commit such acts; but if he is merely a de facto sheriff, then such justification fails and he is, in contemplation of law, not a sheriff at all but merely a wrong-doer who has no defense. 3 “If this were not so, then there is no difference between a legal and an illegal appointment to office, and an officer de facto is the same as an officer de jure, which is absurd.” 4

3. If a de facto sheriff, although armed with a valid writ, enters a man’s house, he is, so far as that man is concerned, a mere trespasser. A trespasser acts at his peril, is absolutely liable for any loss resulting from his acts done while trespassing. For example, one who, as trespasser, enters a house and lights a fire in a fireplace, using all due care in lighting and maintaining the fire, is nevertheless liable if, because of totally unexpected circumstances which no care would have guarded against, the fire bursts out into the room and the house is destroyed. 5

*439 4. And so, I think, as to a de facto bank director, i.e., one who, although elected as a director, fails to fulfill statutory provisions prescribing qualifications for that office. His acts are regarded as valid as to persons who, in good faith, have relied on those acts. But where a de facto director is sued for his conduct, by or on behalf of bank depositors, the attack is “direct” and the de facto director cannot justify by asserting that he acted lawfully as a director. As his conduct is unauthorized, he is, I think, in such a suit to be regarded not as a director but as a mere stranger, a trespasser meddling in an unlawful way with the money of others.

Accordingly, if de facto bank directors are shown to constitute a majority at a directors’ meeting at which action is taken which subsequently leads to the bank’s net loss, they are, I think, liable even if, had they been de jure directors, they would have been without liability because exercising appropriate care. For the de facto directors, being regarded in such a suit as mere trespassers, are to be considered as wrongfully directing the use of other people’s property. No matter how careful ithey may have been in the exercise of their judgment, they are absolutely liable, I ;think, as in effect trespassers, for net losses •flowing from their non-negligent acts. If ihat were not so, there would be no difference between a de jure and a de facto director.

5. In the case at bar it is not clear in what particular instances the de facto directors constituted a majority at meetings at which acts were authorized which subsequently led to net losses. Of course, no de facto director could be held liable for an act authorized or ratified at a meeting which he did not attend. As to meetings, if any, attended by some of the de facto directors, where they were not in the majority, it might perhaps be argued that their presence at those meetings had no relation to such losses, and that the situation was the same as if strangers, known to the directors not to be directors, had been invited to sit and confer with the directors at a ^meeting; obviously such strangers would not be liable for any acts authorized by the directors; and so it might be said that the de facto directors here, where they were in the minority, cannot be held liable for acts authorized.

That argument, however, seems to me to overlook this important fact: The de facto directors did not purport to appear at the meetings as mere strangers. They came purporting to be directors. It was just as if strangers, not even elected to the board, disguised by a make-up man so that they were mistaken for some of the de jure directors, participated in a directors’ meeting. Here the de jure directors, even in instances, if any, when they constituted the majority, presumably gave heed to the views of the pseudo-directors. What the persuasive powers of those pseudo-directors may have been we do not know. Their views may have induced the actions taken at such meetings. Certainly our own experience as members of this court goes to show that not infrequently a decision results from views expressed by one of three judges at our conference on a case, that his views may persuade the other two judges to arrive at a conclusion which, in his absence, they would not have reached.

I believe, therefore, that if the de facto directors had been sued, the burden of proof should have been on them to show that, notwithstanding they did not at any meeting constitute a majority, their views, expressed at the meetings which they attended, did not prevail and did not induce the authorization of acts subsequently resulting in loss to the bank. 6 If that is correct, then defendant had that burden. He did not discharge it. Accordingly, I believe that he should be held liable for all acts, authorized at all meetings attended by any of those persons, at which meetings acts were authorized which later resulted in net loss to the bank.

6. I do not understand the contention that such a conclusion will mean the imposition of liability in the absence of a causal relation between the defendant’s conduct and the losses for which he is held. The defendant was an active participant in the failure of the de facto directors to become *440 de jure directors and is liable only to the extent to which they, would have been, had they been sued. They, in turn, if my thesis were accepted, would be liable only for losses resulting from acts which they authorized or the authorization of which they brought about. To say that there is, under such a rule, an absence of causation is to say that, wherever the doctrine of absolute liability is applied, there is no causation. That is not true. In Rylands v. Fletcher, L.R. 3 H.L. 330, the defendant was liable only because damage resulted from his act of building the reservoir; the trespasser whose non-negligent fire-building leads to destruction of the house is liable only because there is a factual causal chain between his fire-building and that destruction.

Usually one whose conduct results in loss to another is exculpated if he used due care; he is, on grounds of policy, accorded a defense of that sort, despite the fact that the loss is in fact traceable to his conduct. The doctrine of absolute liability does not dispense with the necessity of showing a factual causal chain; it merely strips the defendant of. a defense which he would ordinarily have, because, on grounds of policy, it is considered that he ought not be allowed such a defense. And so here, to impose absolute liability on the de facto directors for losses resulting from acts the authorization of which they induced is not at all to hold them for damage causally unrelated to their conduct. It is scarcely necessary to add that to put the burden of proof on them to show that they did not induce such authorization is no deviation from the rule that factual causation must exist. 7

7. My colleagues note that the trial judge, having adopted what I consider the correct rule as to the nature of the liability of the pseudo directors, did not carry that rule out to its logical conclusion. But, of his failure to go further than he did, the plaintiffs are complaining here on their cross-appeal. My colleagues also suggest that perhaps the plaintiffs have not even on this appeal asked for the full recovery to which they would be entitled under that rule; they indicate that, to be logical, the receiver, on his appeal, should have asked for damages to the stockholders resulting from the acts authorized by the de facto directors. But what of it? If a party, logically or illogically, waives a portion of the damages to which he would have been entitled, that is his privilege; such a waiver of part of that which he could otherwise have recovered can, of course, not deprive him of the right to the unwaived balance.

It is further suggested that, under the rule I consider correct, possibly some “negligent losses” will go unchallenged. That suggestion I do not comprehend, since the pseudo directors would have been liable for net losses resulting from their acts whether negligent or not, and the de jure directors would have been liable for all losses authorized by them where they acted negligently; as the defendant, will be liable wherever the de jure or de facto directors would have been liable, he cannot conceivably escape liability for “negligent losses.”

8. Judge CLARK and Judge HAND agree that there was a clear violation of § 72 and that the defendant was responsible for that violation, but reject my views for the following reasons (in addition to those which I have already discussed) : (a) There was no proof that the pseudo directors were “irresponsible or untrustworthy men” and “proceeded forthwith to loot the bank’s exchequer”; (b) it would be unwise, as a matter of policy, so to construe the statute as to hold that directors who violate § 72 act at their peril, since such a rule would make “prudent and responsible men loath to accept directorates, to the community’s loss in lack of men of caliber for these positions of trust,” citing Yates v. Jones National Bank, 206 U.S. 158, 179 , 27 S.Ct. 638 , 51 L.Ed. 1002 ; (c) Briggs v. Spalding, 141 U.S. 132, 152 , 11 S.Ct. 924 , 35 L.Ed. 662 , supports the position that failure to comply with § 72 does not have the consequences I would attach to it. I *441 cannot agree with any of those suggestions.

(a) When a de facto sheriff is sued, it is no defense that he was not “irresponsible or untrustworthy” or dishonest or was acting otherwise than heo could lawfully have done if he had been a de jure sheriff. Why should there be a different rule as to de facto directors?

(b) It is not true that to hold that de facto directors act at their peril would prevent “prudent and responsible men” — men “of caliber for these positions of trust” —from serving as directors. If men are prudent, trustworthy and responsible — are of such caliber that they will wisely conduct the bank’s business — they will surely see to it that they themselves comply with so clear and simple a statutory requirement as is contained in § 72. Yates v. Jones National Bank, 206 U.S. 158, 179 , 27 S.Ct. 638 , 51 L.Ed. 1002 , relates solely to de jure directors.

(c) Briggs v. Spalding, supra, seems to me not to be relevant. There, before anything had been done which resulted in loss to a bank, a director sold his stock and also orally resigned. The Supreme Court, in holding that he was not liable for acts done thereafter, stressed the fact that his oral resignation was valid and effective. From this fact my colleagues reason thus: Although the statute says that a director who ceases to own stock shall “thereby vacate” his office, the Supreme Court held, in effect, that, by the sale of his stock, a director does not cease to be a director; therefore, the failure, in the first instance, to own any shares would not prevent one elected as a director from holding such office. I entirely agree that the failure to own stock or the sale of stock theretofore owned does not mean that one who is elected as a director is not a director de facto and liable as such. Nothing in Briggs v. Spalding, goes further; it merely held, at most, that although a director had disposed of his shares, he would continue to be liable unless, before acts were done which occasioned loss to the bank, he had effectively resigned.

The defendant makes the following argument to show that a violation of § 72 will have some legal consequences even if what I believe to be the correct rule is rejected: § 73 requires each person when appointed or elected a director to take an oath that he is the owner in his own right of the requisite number of shares; as the pseudo directors here took such an oath, they perjured themselves, says defendant, and therefore could have been indicted and convicted for perjury. To that argument there are several answers: (a) § 73 is distinct and apart from § 72, so that punishment for perjury under § 73 is not a remedy for violation of § 72. Suppose a person elected a director violated § 72 and also failed to take the oath required by § 73; he could not then be criminally punished for violation of § 73 and yet, according to defendant and my colleagues, no civil liability would attach to his acting as director, (b) I find no cases which hold that a de facto sheriff who enters the land of another is immune from a civil action for trespass merely because he is criminally liable for perjury, when, in taking the oath of office, he falsely swore that he had complied with statutory provisions establishing qualifications for that office, (c) That criminal actions are available is ordinarily no bar to civil liability; many an actionable civil tort is also criminally actionable. 8 No one has ever suggested that even a de jure director is free from civil liability for his negligent acts because they are of such an aggravated character that he might also be convicted of a crime.

§ 72 provides not only that a director must own a certain number of shares, but also that he must be a citizen. The majority opinion so construes the section that one who is elected a director can ignore the condition as to owning shares, and yet become a de jure director with the defenses open to such a director. There is no conceivable reason for differentiating that requirement from the requirement as to citizenship. Accordingly, under the majority’s interpretation, an alien can lawfully serve as a de jure director although the statute explicitly says that he “must” not. Congress, in § 72, said “must,” but my colleagues hold that all it meant to say *442 was this: “We merely suggest that it would please us if every director were a citizen and owned a certain number of shares, but this is only a suggestion.” My colleagues concede that there was a “lack of effective means of enforcing” § 72 until the statute was amended in 1933, 9 several years after the bank involved in this case had failed. But that alleged lack of “effective means” derives solely from the strange interpretation which my colleagues give to the statute. Admittedly § 72, as they construe it, had, before 1933, no practical legal consequences and was but a prayer or polite request. Its three sentences, consisting of some one hundred and eighty words, my colleagues, in effect, erase from the statute. I do not believe we are empowered to use such judicial erasers.

To be sure, courts, when trying to carry out the legislative intention, may disregard the literal meaning of words if it would lead to absurd results. It is true, too, that often a judicial interpretation of a statute unavoidably involves some judicial legislation. My betters have found no cause for apprehension in the inescapable necessity for some “law making” by courts ; 10 it is folly to believe that the three traditional departments of government can avoid some overlapping of their functions. 11 But when courts go beyond modest “interstitial” judicial legislation, they are breaking away from constitutional restraints. Judicial legislation should not go so far as to eliminate legislative legislation unless it is unconstitutional.

Nor, except perhaps in most unusual circumstances, should judges impute to Congress the intention that a statutory provision is to have no practical effect. When Congress imposes a duty, it is queer to decide that the obligation to discharge the duty is to have no effective sanctions; one does not need to be a disciple of Hobbes or Austin to believe that the legislature means to have its commands respected.

It is true that some statutes which use the word “must” or “shall,” are properly interpreted as merely permissive or “directory” and not as mandatory; but those are exceptional interpretations made where it is apparent that the statutory provisions were “designed to secure order, system, and dispatch in proceedings,” and that “by a disregard of” those provisions “the rights of parties interested cannot be injuriously affected.” 12 The provisions of § 72 are not of that character. Obviously Congress, in stating that directors should be citizens and should own a certain amount of stock, established those qualifications because it considered that they would be for the protection of depositors. Consequently, § 72 was not designed merely to secure order and dispatch in the proceedings of the bank; a disregard of its provisions might well injuriously affect the rights of the depositors. When a sheriff fails to com- • ply with a statute establishing qualifications for holding that office, and is sued for trespass by one whose land he has invaded, the courts hold that those statutory provisions are not merely “directory” but are “mandatory.”

Judges should not rub out an unambiguous statutory provision simply because, if they had been members of Congress, they would have voted against it. The desirability of legislation is for the legislature, not for us. As we recently said, judicial amendments of legislation “would require consideration of questions of legislative policy * * *; to discharge that task efficiently we would be obliged to hold a sort of Congressional Committee hearing, at which all interested persons would be heard, so as to be sure that our amendments would not entail unforeseen and undesirable results. We have no power to embark on such an enterprise.” 13

In Matter of Ringler & Co., 204 N.Y. 30, 42, 46 , 97 N.E. 593 , Ann.Cas.1913C, 1036, the. doctrine relating to de facto public officers is applied to de facto corporate directors.

Nichols v. MacLean, 101 N.Y. 526, 538, 539 , 5 N.E. 347 , 54 Am.Rep. 730 ; Carpenter v. Clark, 217 Mich. 63 , 185 N.W. 868, 870, 871 ; Pack v. United States, 41 Ct.Cl. 414, 430 ; Patterson v. Miller, 2 Metc. 493 , 59 Ky. 493, 496, 498 ; Hughs v. James, 3 J.J.Marsh 699, 26 Ky. 699, 670 ; Pearce v. Hawkins, 2 Swan 87 , 32 Tenn. 87, 89, 90 , 57 Am.Dec. 54; Hussey v. Smith, 99 U.S. 20, 24 , 25 L.Ed. 314 ; Norton v. Shelby County, 118 U.S. 425, 441 , 6 S.Ct. 1121 , 30 L.Ed. 178 ; 57 C.J. 794-795; 46 C.J. 1047, 1061; Throop, Public Officers, 614-615, 623.

Cummings v. Clark, 15 Vt. 653, 658 ; Patterson v. Miller, supra; Pearce v. Hawkins, supra; Blake v. Sturtevant, 12 N.H. 567, 573 ; Brewster v. Hyde, 7 N.H. 206 ; Miller v. Callaway, 32 Ark. 666 ; Pooler v. Reed, 73 Me. 129 ; Stubbs v. Lee, 64 Me. 195 , 18 Am.Rep. 251 ; People v. Weber, 89 Ill. 347 ; Throop, loc. cit.; C. J. loc. cit.; Cf. Gourley v. Hankins, 2 Iowa 75 , 76a; Matter of Ringler, supra; Green v. Burke, 23 Wend. 490, 503 ; Hughs v. James, supra; Short v. Symmes, 150 Mass. 298 , 23 N.E. 42 , 15 Am.St.Rep. 204 .

Pearce v. Hawkins, supra; Cf. Riddell v. Bedford County, 7 Serg. & R. 386, 392: “The sound distinction * * * is, that the office is void” as to the officer himself, “but not as to strangers.”

Wynant v. Crouse, 127 Mich. 158, 162, 163 , 86 N.W. 527 , 53 L.R.A. 626 ; Southern Counties Ice Co. v. RKO Radio Pictures, D.C., 39 F.Supp. 157, 159, 160 ; Eten v. Luyster, 60 N.Y. 252, 253, 260 ; Newsom v. Meyer, 93 Conn. 93 , 128 A. 699, 700 ; Keesecker v. G. M. McKelvey Co., 64 Ohio App. 29 , 27 N.E. 787 , 789, 790; Badu v. Satterwhite, Tex.Civ.App., 125 S.W. 929 ; Lee v. Stewart, 218 N.C. *439 287 , 10 S.E.2d 804, 805 ; Cribbs v. Stiver, 181 Mich. 82 , 147 N.W. 587 ; Restatement of Torts, § 380.

Unless such a burden of proof rule is ; applied, probably no consequence will ever attach to a violation of § 72 unless a majority of those purporting to be directors who attend directors’ meetings are guilty of such violation, i. e., violation of § 72 by a single director will probably never have any legal consequences.

My colleagues have, I believe, misunderstood what I have said as to the burden of proof; for they indicate that, wherever in the majority opinion there is a ruling that recovery is to be allowed, that ruling takes into account all the evidence as to the impropriety of the directors’ acts. But none of those rulings takes into account the burden of proof on the defendant to show that, in those instances where a pseudo director attended a meeting, the pseudo director did not bring about the authorization of an act which resulted in a net loss to the bank for which that de facto director, as a trespasser, should, I think, have been liable if sued, and for which the defendant therefore should be liable.

Moreover, everyone knows that a criminal action for a false oath is usually an inefficacious remedy. To say nothing of the difficulties arising from the statute of limitations in such an action, it would seem that to convict the pseudo directors for perjury would require proof — and beyond a „ reasonable doubt — that they were fuEy cognizant of the falsity of their statements.

My colleagues refer to § 77 which provides for a removal of a director by the Board of Governors of the Federal Reserve System upon certification by the Comptroller of continuous violation of the banking statute; they also refer to § 71a. Both those sections first appeared in the statute in 1933.

See authorities cited in Commissioner v. Beck’s Estate, 2 Cir., 129 F.2d 243, 245 , notes 3 and 4; Beidler Brookmeyer, Inc., v. Universal Insurance Co., 2 Cir., 134 F.2d 828 .

See Bondy, The Separation of Governmental Powers, 5 Studies in History, Economies and Law, Columbia College (1896).

French v. Edwards, 13 Wall. 506, 511 , 20 L.Ed. 702 ; Escoe v. Zerbst, 295 U.S. 490, 494 , 55 S.Ct. 818 , 79 L.Ed. 1566 ; Lyon v. Alley, 130 U.S. 177, 185 , 9 S.Ct. 480 , 32 L.Ed. 899 ; Erhardt v. Schroeder, 155 U.S. 124, 128, 130 , 15 S.Ct. 45 , 39 L.Ed. 94 .

Commissioner v. Beck’s Estate, 2 Cir., 129 F.2d 243, 246 .