The opinion of the court was delivered by: Decker, District Judge.
With regard to the inclusion of the obligations of the three
individuals who controlled Automatic Accounting, the statute says
nothing about combining loans to the stockholders with those to
the corporation. However, it is established in the case law that
if a loan, made in the name of an employee or shareholder of the
corporation, is treated in substance as a loan to the corporation
then it may be combined with other loans to the corporation. See
Atherton v. Anderson, 86 F.2d 518, 529 (6th Cir. 1936), rev'd on
other grounds 302 U.S. 643, 58 S.Ct. 53, 82 L.Ed. 500 (1937);
Hughes v. Reed, 46 F.2d 435, 442 (10th Cir. 1931):
The only evidence offered in this regard was the testimony of
Mel Goldman. When asked if the present unpaid obligations of
himself, Heisler and Brown represented amounts borrowed
for personal or business use, he stated that they "were for use
in the businesses." There is no evidence to show which businesses
these loans were to be used for or whether the proceeds were
in fact used for corporate purposes, as distinguished from the
business purposes of the individuals. And the evidence showed
that these individuals had affiliations with corporations other
than the three here involved. Plaintiff has failed to show that
these were only nominal obligations of the signatories, and
therefore they cannot properly be combined with loans to the
During the period from July 6, 1965 to June 10, 1966, when the
last extension of new money was made to this group of obligors,
the Bank's 10 per cent limit ranged from $156,296.46 to
$187,763.26. Bank records show that the balance due on loans to
all three individual debtors, either jointly or singly, never
exceeded $65,000. Thus, no violation of section 84 occurred as to
these obligations and plaintiff is entitled to no recovery in
count 1 for damages suffered due to default thereon.
Bank records reveal that the combined obligations of Automatic
Accounting and PMC first exceeded the 10% limit on December 16,
1965 and reached their peak on February 25, 1966. On the latter
date the combined obligations were $219,733.77, exceeding by
$41,662.66 the then existing 10% limit of $178,071.11.*fn1
The Bank's outstanding loans to Sports Packaging first exceeded
the legal limit on April 2, 1966 and reached their highest level
on May 5, 1966. On that date Sports Packaging's loans totaled
$206,807.44, $19,044.18 more than the allowable limit of
With regard to the Automatic Accounting-PMC loans, there can be
little doubt that defendant Keller was aware that they exceeded
the 10 per cent limit. Pursuant to discussions between Keller and
the principals of Automatic Accounting, the Bank initially lent
that corporation $30,000 on July 15, 1965. The proceeds were used
as a down-payment on a purchase of Christmas books from Time-Life
Books. On July 19, 1965, Keller issued a letter of credit in
favor of Time-Life on Automatic Accounting's behalf. That letter
of credit guaranteed payment of up to $285,425, an amount which,
had it been demanded in full, would have created an obligation
far in excess of the 10 per cent limit. In fact, the Bank lent
only $78,759 pursuant to this letter of credit, but it did make
additional loans to Automatic Accounting for the purchase of the
Shortly after the Time-Life letter of credit issued, Automatic
Accounting presented Keller with a similar financing proposal
regarding the purchase of cameras for resale. Keller authorized
an extension of credit for this purpose and the first "camera
loan" was made on October 2, 1965. In February, 1966 the
principals of Automatic Accounting sought a further loan from the
Bank through Leonard Brody, a loan officer. The obligations of
that corporation had reached approximately $184,000, which
exceeded the 10 per cent limit. Informed of this by Brody, and
informed that no further loans could be made, the principals of
Automatic Accounting stated that they would talk to Keller.
Shortly thereafter Keller told Brody that all subsequent camera
loans would be made to PMC, and that the existing camera loans
should be transferred from Automatic Accounting to PMC. These
directions were complied with.
Keller was hospitalized with a heart attack from October 3,
1965 to November 12, 1965 and did not return to the Bank until
January of 1966. He was again hospitalized from February 11 to
March 2, 1966, returning to the Bank on March 9, and was once
from May 31 to June 25, 1966. Following each illness his
attendance at the Bank was limited to short periods each day. He
argues from these circumstances that he could not have been aware
that the loans to Automatic Accounting-PMC exceeded the legal
limit. However, the loans first exceeded the limit before he
suffered these illnesses, and he was informed of the status of
the loans by Brown, Goldman and Heisler at a meeting at his home
in January, 1966 and by a written briefing on April 7, 1966.
Moreover, he was actively involved in these obligors' affairs as
late as May 13, 1966, when he issued a letter of credit on
Automatic Accounting's behalf.
Keller also argues that the fact that the majority of the loans
were formally approved by other Bank officers demonstrates that
he was not aware of their existence. Testimony revealed, however,
that formal approval by initialing the register slips was done in
most instances only after the loan had been authorized by Keller.
It was Keller with whom Brown, Goldman and Heisler dealt when
they sought new extensions of credit.
From the foregoing evidence, the conclusion is inescapable that
Keller knowingly permitted excess loans to PMC and Automatic
With regard to the loans made for the purchase of cameras,
Keller claims that a 25% limit is applicable pursuant to
exception (6) of 12 U.S.C. § 84:
"Obligations of any person, copartnership,
association, or corporation, in the form of notes or
drafts secured by shipping documents, warehouse
receipts, or other such documents transferring or
securing title covering readily marketable
nonperishable staples when such property is fully
covered by insurance, if it is customary to insure
such staples, shall be subject under this section to
a limitation of 15 per centum of such capital and
surplus in addition to such 10 per centum of such
capital and surplus when the market value of such
staples securing such obligation is not at any time
less than 115 per centum of the face amount of such
obligation * * *."
In the first instance, I think that defendant has waived any
reliance on this exception by failure to plead it in his answer,
for it is "matter constituting an avoidance or affirmative
defense" within the meaning of Rule 8(c), Fed.R.Civ.P.
Assuming that reliance on exception (6) has not been waived,
that exception is inapplicable to the facts of this case.
Although evidence showed that the first shipments of cameras were
fully insured, as required by the exception, there was no
evidence that the subsequent deliveries were insured. Moreover,
electric movie cameras do not fall within the definition of
"readily marketable nonperishable staples." The Comptroller's
Manual for National Banks, ¶ 1550 (4 CCH Fed.Banking L.Rptr.
¶ 59,727) has interpreted this phrase to exclude most fabricated
"Exception 6 is designed primarily to apply to such
basic commodities as wheat and other grains, cotton,
wool, basic metals such as tin, copper and lead, and
the like. With few exceptions, fabricated
commodities, unlike such uniform staples, do not
constitute standardized interchangeable units
regardless of the manufacturer and, accordingly, they
do not possess the same broad marketability and do
not qualify as readily marketable staples."
This interpretation of the breadth of the exception is consistent
with the plain intention of its drafters. Defendant has not shown
the interchangeability of these cameras, nor their ready
marketability, and hence the exception is inapplicable.
Sports Packaging received its first loan from the Bank in
October, 1965. Through additional loans, and renewals, the total
obligations of this corporation reached a high of $206,807.44 on
May 5, 1966. The evidence disclosed that the
proceeds were to be used to purchase fishing equipment
manufactured in Hong Kong for packaging and resale in this
country. Ronald Brown and Mel Goldman both testified that the
loans to Sports Packaging were negotiated through Keller.
Although Keller denied that he had initiated this line of credit,
it is undisputed that he attended at least six Loan and Discount
Committee meetings where Sports Packaging loans or renewals were
Furthermore, a status report on the Sports Packaging debt
structure was given to Keller by Brown, Goldman and Heisler at
Keller's home in January, 1966. And by letter of April 7, 1966
Keller was informed of Sports Packaging's intentions regarding
renewal and repayment of its various obligations. On this date
the corporation's obligations to the Bank totaled more than
$193,000, exceeding the legal limit by approximately $6,000.
Keller testified that this report was submitted at his request
because he wanted some of the loans to be paid up. It taxes
credulity to urge that, despite this awareness of and concern
with the debts of Sports Packaging, Keller was unaware then and
at subsequent times that these loans were unlawfully excessive.
I conclude that Keller knowingly assented to and acquiesced in
the excessive loans to Sports Packaging.
Having concluded that the loans to Automatic Accounting-PMC,
and the loans to Sports Packaging, constituted violations of
section 84, this court must determine what damages the Bank has
"sustained in consequence of such violation." 12 U.S.C. § 93.
Plaintiff maintains that the total uncollected obligations of
these corporations to the Bank, amounting to approximately
$206,000, constitute the proper measure of recovery. Defendant
contends, however, that only the excess over the 10 per cent
limit may be recovered.
The standard to be followed is that set out in Corsicana Nat'l
Bank v. Johnson, 251 U.S. 68, 40 S.Ct. 82, 64 L.Ed. 141 (1919).
In that case the Bank made one $15,000 loan to each of two
co-venturers on the same day. Finding that these loans could
properly be considered one loan of $30,000, which would exceed
the Bank's $20,000 lending limit, the Court addressed itself to
the damage issue (at 87-88, 40 S.Ct. at 90):
"We assume that if, in good faith and in the ordinary
course of business, defendant had made a loan of
$20,000 to [the obligors], and if while this loan
remained unpaid he had afterwards and as a separate
transaction unlawfully loaned them an additional
$10,000, in excess of the limit, the damage legally
attributable to his violation of the limiting
provision would have been but $10,000. But that is
not this case. According to the evidence, the
$30,000, less discount, was paid out by the bank as a
single payment; and, if the jury found it to have
been loaned in excess of the statutory limit * * * it
must be upon the ground that it was a single
transaction. That being so it would follow that the
entire amount disbursed by the bank was disbursed in
violation of the law. The cause of action against a
director knowingly participating in or assenting to
such excessive loan would be complete at that moment,
and entire; there would be no legal presumption that
the borrowers would have accepted a loan within the
limit, if their application for the excessive loan
had been refused; nor that a director who in fact
violated his duty as defined by law would, if mindful
of it, have loaned them even $20,000. * * * Hence the
entire excessive loan would have to be regarded as
the basis for computing the damages of the bank."
See also, Holman v. Cross, 75 F.2d 909, 912 (6th Cir. 1935).
The evidence in this case disclosed that the legal limit was
exceeded by a series of transactions, rather than by one as in
the Corsicana case. And contrary to the facts of that case, no
payout by plaintiff Bank exceeded the legal limit.*fn2 Because
the violations of the Act did not occur until the individual
loans which brought the total indebtedness over the limit were
made, only funds then and thereafter paid out were lost "in
consequence of such violation."
The obligations of Automatic Accounting and PMC first exceeded
the limit when loans of $20,353.89 (loan no. 6294) and $10,164.31
(loan no. 6286) were made on December 16, 1965. The outstanding
balance before these loans were made was $156,578.33; afterwards,
it was $187,096.53, whereas the lending limit was then
$167,584.20. The damages sustained as a result of this violation
are therefore the difference between the greatest amount of the
combined obligations of the corporations, $219,733.77 on February
25, 1966, and $156,578.33, or $63,155.44.
As to Sports Packaging, its obligations first exceeded the
legal limit on April 2, 1966 when a loan of $23,727.92 (loan no.
7314) was made and loan no. 6339 was renewed and slightly
increased by loan no. 7317. The total obligations before these
transactions amounted to $170,171.38, while the largest total,
reached on May 5, 1966, was $206,807.44. The recoverable damages
are therefore equal to the difference — $36,636.06.
Judgment will accordingly be entered in favor of plaintiff and
against defendant on count 1 in the amount of $99,791.50.
Moreover, plaintiff is entitled to interest thereon from the date
this action was filed. Gamble v. Brown, 29 F.2d 366, 381 (4th
Cir. 1928), cert den. 279 U.S. 839, 49 S.Ct. 253, 73 L.Ed. 986.
The findings heretofore made demonstrate that defendant Keller
was aware of the loans made to Brown, Goldman and Heisler, and to
the three corporations in which they had an interest, and that he
in fact initiated the lines of credit to all of them. Remaining
for decision on count 2 are the questions whether his
participation in these transactions constituted negligence or
mismanagement of corporate affairs and, if so, whether it was the
proximate cause of plaintiff's losses. The standard against which
his actions must be tested was succinctly stated in Wallach v.
Billings, 277 Ill. 218, 233-234, 115 N.E. 382, 388 (1917):
"Where the directors of a corporation are guilty of a
breach or neglect of duty and the proximate result of
such breach or neglect of duty is a loss to the bank
there may be a recovery from such directors."
Plaintiff relies heavily on the fact that Keller failed to
follow Bank regulations in certain of his dealings with this
group of obligors. Thus it was established at trial, through the
testimony of two Bank directors, a loan officer, and a cashier,
that the initial letter of credit to Time-Life, in an amount in
excess of $285,000, was issued by Keller without the required
prior approval of the Loan and Discount Committee and without the
knowledge of any other Bank director or officer. It was further
established that some subsequent loans were authorized by Keller
without first receiving the approval of the Loan and Discount
But violation of a bank's internal rules and regulations with
regard to lending procedure does not, without more, make a
director and officer liable for the default of such loans. The
common law imposes liability only for lack of diligence or
negligence in the conduct of his official duties; it does not
make him an insurer of the success of all ventures merely because
corporate procedures are ignored. Hoehn v. Crews, 144 F.2d 665,
673 (10th Cir. 1944), aff'd 324 U.S. 200, 65 S.Ct. 600, 89 L.Ed.
870; 3 Fletcher, Cyclopedia of Corporations §
1035 (1965 Rev.Vol.). Thus the issue is whether the authorization
of the loans to these obligors constituted negligence in the
performance of Keller's duties.
There was little evidence offered as to the soundness of the
loans to these borrowers. The corporate obligors are no longer
doing business and their assets, having been liquidated, are
exhausted. But plaintiff adduced no evidence to show why the
loans were defaulted or why the book, camera and fishing
equipment ventures did not succeed.*fn3
Approximately $165,000 of the $206,000 in unpaid obligations of
the corporations were secured by warehouse receipts or accounts
receivable. Plaintiff offered no evidence to show the value of
this collateral. Bank records offered by defendant demonstrate,
however, that the value of the collateral for the initial secured
loans to all three corporations exceeded the amount of the loans.
Moreover, the corporations maintained deposit balances with the
Bank at various times throughout this period, some of which were
"frozen" by the Bank.
Of the approximately $43,000 in outstanding obligations of the
individuals, none are secured but one is a joint obligation of
all three and one is guaranteed by another of the individuals. No
evidence was introduced to show that these loans were excessive
in light of the net worth of these individuals, or that they were
risky investments in other respects. And with regard to the
corporations, although certain of the loans were excessive within
the terms of the National Banking Act, no evidence of corporate
capital structure was admitted which would permit an inference
that the loans were fiscally unsound.
In the final analysis, plaintiff's evidence of negligence
amounts only to the fact that a portion of the loans to these six
obligors were not repaid. Plaintiff is, in effect, asking this
court to apply the doctrine of res ipsa loquitor and conclude,
from the fact of default, that these loans were unsound from
their inception and that their authorization was negligent. If
this were the rule, however, bank directors would be required to
respond in damages every time a loan proved uncollectable. And
this is clearly not the law. See, e.g., 3 Fletcher, Cyclopedia of
Corporations, supra. Thus the only possible conclusion from the
evidence in this case is that there is a failure of proof of
negligence or mismanagement on defendant's part.
Plaintiff also offered evidence tending to show that Keller
breached his fiduciary duty of loyalty and good faith to the
Bank. He used an air travel credit card issued to Automatic
Accounting to pay for a trip to Florida for himself and his son
in December, 1965. And his wife used an Automatic Accounting
credit card, signing her maiden name, to purchase gasoline in
1966 in an amount of $130, $100 of which was later paid back by
Certainly the receipt of these benefits from the Bank's
borrowers constituted a breach of trust, and Keller would be
liable to plaintiff for the value of the benefits received. See,
e.g., Fleishhacker v. Blum, 109 F.2d 543, 545-546 (9th Cir.
1940), cert. den. 311 U.S. 665, 61 S.Ct. 23, 85 L.Ed. 427 (1940).
But this breach of trust does not constitute evidence that the
loans to Automatic Accounting were unsound when made, and it does
not serve to impose absolute liability on Keller for the
It was also shown at trial that Keller had plans to leave the
Bank and form a conglomerate corporation with Goldman, Heisler
and Brown. This enterprise was to include the business ventures
of these obligors as well is certain real estate ventures in
which Keller had an interest. Had plaintiff proved a lack of
reasonable care on Keller's part in extending loans to these
obligors, this evidence
would tend to explain why he was willing to commit the Bank to
such unreasonable risks. But it cannot substitute for evidence of
negligence or intentional mismanagement, and it does not show
that the granting of these loans was an unsound corporate
decision in the first instance.
In summary, this court has concluded that plaintiff has failed
to prove that defendant breached his duty of care and diligence
in authorizing the uncollected loans to Automatic Accounting,
PMC, Sports Packaging and Goldman, Heisler and Brown. Moreover,
plaintiff has failed to prove that defendant's breaches of trust
caused these losses to the Bank. Judgment will accordingly be
entered in favor of defendant and against plaintiff on count 2.
For the reasons herein stated, judgment is entered in favor of
plaintiff and against defendant on count 1 in the amount of
$99,791.50 plus interest at the legal rate from July 10, 1968,
and in favor of defendant and against plaintiff on count 2.