Pritchard v. Myers

Parke, J., delivered the opinion of the Court. David Pritchard and twenty-eight other creditors and depositors, or their representatives, of the Oxford Bank instituted on May 29th, 1937, in Talbot County, a suit in equity against Oliver S. Gallup, J. McKenny Willis, J. Frank Richardson, Jesse A. Delahay, Aubrey B. Harris, W. Graham Newnam, directors of the Oxford Bank, and William H. Myers, Jr., administrator of William H. Myers, and Hester Anne Kirby, executrix of Robert W. Kirby, the personal representatives of two other directors of the bank. The demurrer of all the defendants to the bill of complaint was sustained, and a decree passed which dismissed the bill. The appeal by the complainants is from this decree.

The bill of complaint was filed by certain creditors and depositors of the Oxford Bank, a body corporate of the State of Maryland, which had been engaged in the business of; banking at Oxford, Maryland. The plaintiffs brought the suit as well for themselves as for all other creditors and depositors who were similarly situated. Their complaint averred that on and before January 7th, 1931, the bank had been engaged in the affairs of its business and had continued its operations until Decern ⁷⁰ ber 18th, 1934, when the bank closed its doors because, of its insolvency. In a proceeding then begun by the State of Maryland against the Oxford Bank, a receiver was appointed to liquidate the resources of the bank, and, after their liquidation, to distribute the proceeds among the creditors and other parties in interest under the supervision, direction, and control of the equity court, which had assumed jurisdiction for these purposes.

The position and claims of the plaintiffs either as depositors and creditors, or as the personal representatives of such depositors and creditors, were established as subsisting on December 18th, 1934, by the reports filed in the proceedings in the receivership cause, which is known as No. 2092 Equity on the Equity Docket Of the Circuit Court for Talbot County. The directors, who served any portion of the period from January 7th, 1931, to December 18th, 1934, or their personal representatives in the cases of the two who have died, are made parties defendant. These directors did not all serve during the whole period, and the differences in their respective times of service cause them to fall into three separate groups. William H. Myers, Oliver S. Gallup, J. McKenny Willis, J. Frank Richardson, Jesse A. Delahay, and Robert W. Kirby constituted the board of directors from January 7th, 1931, to January 11th, 1933. ■ From the end of this first period to August 6th, 1934, the six directors named and Aubrey B. Harris and Graham Newnam composed the second group.

All the eight directors whose names have been given, with the exception of William H. Myers, were the seven directors who formed the directorate from August 6th, to December 18th, 1934. The plaintiffs are shown to have been depositors and creditors during a long period before the day the bank closed its doors; and from January 7th, 1931, to that date these three separate .groups of directors are charged, jointly and indiscriminately in point of time and without •reference to their terms of office, with official misconduct which caused the plaintiffs serious money losses, whose ⁷¹ several amounts are not ascertainable by the facts alleged. All that appears, is that on their claims, which have been proved and filed in the receivership proceedings, a first distribution dividend of forty per cent, of the amounts has been paid, and the final expected dividend is twenty-five per cent., which will leave a principal amount of thirty-five per centum of the entire sum claimed as the loss which is alleged to be chargeable to the official misconduct of the defendant directors. The wrongful acts attributed to the defendant directors is that, since January 7th, 19,31, until the bank defaulted and closed its doors, the defendants as directors knew or should have known that the bank was “totally insolvent, its capital stock and surplus impaired and lost during the times these complainants made and were making their deposits.” In addition to the charges of neglect, the further allegations are that by their negligent discharge of official duties these directors represented the bank as safe, solvent, and prosperous and brought about its ruinous financial condition by (a) the publication of false statements of its financial condition; (b) the declaration and payment of illegal dividends on the capital stock without making reasonable inquiry as to the financial condition; (c) the negligent disobedience and disregard of the recommendations and demands of the state banking commissioner with respect to charging off depreciated securities and losses sustained by speculative accounts; (d) the listing of assets at grossly excessive values; and (e) the imprudent appropriation of funds in hazardous and insufficiently secured investments.

The conduct mentioned is averred to have induced the plaintiffs to deposit and keep their funds with the bank in the belief that the financial position of the bank was sound and that the alleged misconduct of the directors and the insolvency and financial condition of the bank were not known to the complainants until after they had obtained permission of the court in May, 1935, to make an examination of the affairs of the bank before the court had assumed jurisdiction under the receivership. ⁷² The bill of complaint concludes with the statement that the receiver of the bank had been requested to proceed against the directors for the benefit of the depositors and creditors, but, after the findings and report of master and special counsel who had been appointed by the chancellor of the court in which the receivership is being administered to make an investigation of the affairs of the bank and the liability of the directors, the receiver had refused to act. The report is filed with the bill of complaint and is made a part thereof. The allegations in the charging portion of the bill of complaint of the facts upon which the complainants base their prayer for relief are as general as the preceding statements of the bill. Although the gravamen of the bill is official misfeasance equivalent to fraud, the averments actually made ;are the conclusions of the pleaders from the facts assumed to exist within their knowledge, but, in order to know if these facts are sufficient for the conclusions, the! facts must be sufficiently disclosed by the bill of complaint.

Lamm v. Burrell, 69 Md. 272, 274 , 14 A. 682 ; Fried v. Burk, 128 Md. 548, 554, 555 , 97 A. 909 ; Boyd v. Shirk, 125 Md. 175, 179-181 , 98 A. 417 . The rules of equity pleading require that every fact and circumstance necessary to entitle the plaintiff to relief must be clearly and definitely, certainly, and specifically, stated in the bill of complaint. If fraud be the ground of relief, the rules are rigorous in their exaction of a distinct and specific statement of the facts and circumstances which constitute the fraud. The soundness and necessity of these requirements of good pleading are strikingly illustrated by the record at bar.

While the bill of complaint, apart from the exhibit, is vague and general, the exhibit is precise, specific, and clear in reference to the grounds of relief relied on in the bill. The pleaders have made the exhibit, without any reservations, a part of the bill of complaint, and, thus incorporated, the general allegations of the bill of complaint are taken as qualified and limited by the exhibit, and, to the extent of conflict between the material averments of ⁷³ the bill and the exhibit, the exhibit will prevail. Peabody v. George’s Creek C. & I. Co., 120 Md. 659, 666 , 87 A. 1097 ; Ridgely v. Wilmer, 97 Md. 725, 729 , 55 A. 488 ; Wilmer v. Ridgely, 131 Md. 501, 503 , 102 A. 745 ; Schuler v. Southern Iron etc. Co., 77 N. J. Eq. 60, 75 A. 552 ; Price v. Solberg, 269 Ill. 459 , 109 N. E. 1024 ; Briggs v. Fleming, 112 Ind. 313 , 14 N. E. 86 ; Roller v. Murray, 107 Va. 527, 59 , S. E. 421. The exhibit is the report of special counsel who was appointed by the court in which the receivership of the bank is in course of administration.

The court passed the order so that the court and receiver might be advised whether any cause of action exists against the officers and directors: of the bank because of unlawful acts, omissions, or mismanagement in the operation of the bank. The examination and report began with December 31st, 1929, and covered the entire period to the receivership. From this official report it appears that the bank was open until February 25th, 1935. It remained closed until it passed into the custody of a conservator under chapter 46 of the Acts of 1933, until the pending receivership began pursuant to the provisions of Code 1924, art. 11, sec. 8, Code (Supp. 1935), art. 11, secs., 8A and 9B.

The receiver is the bank commissioner of the State of. Maryland and the report is the result of an examination of the records of the bank with the co-opération of the bank commissioner and his official assistants. The report is lengthy and presents a statement and an analysis of the financial condition of the bank with reference to its assets and liabilities, and the conduct and responsibility in office of its directors. In brief, the report is a particular denial and refutation of the general, accusatory allegations of the body of the bill of complaint, with the exception of the charge of the declaration and payment of unearned dividends.

In respect of the bare charge in the body of the bill of complaint of “illegally declaring and paying dividends on its capital stock without making reasonable inquiry as to the condition of said bank,” the report supplies the requisite certainty ⁷⁴ and definiteness of good pleading by stating the number, the times, the rate, and the aggregate amounts of the dividends declared and paid, with the facts which made improper and illegal the declarations and payments of these dividends and the directors liable. In respect to the other charges, the report exonerates the directors. It holds the present situation, except as to the payment of dividends, not to be due to any criminal or wrongful motive, nor to lack of supervision, but to bad judgment in investments, unwise management, and lack of capacity on the part of the directors, which, however, was not such gross negligence as would amount to a breach of trust from which resulted losses for which the directors could be held personably liable. The examination and report were made at the instance and for the information of the court.

It was an official paper whose statements are neither impeached nor questioned nor its conclusions assailed nor avoided by the pleaders,