## Facts

- A receiver for a small national bank sued the bank’s former president (through his estate) and former directors in equity to recover losses caused by an employee’s prolonged theft and falsification of records.
- The bank had $100,000 capital and roughly $300,000 average deposits, with a small staff including a cashier and a bookkeeper.
- A messenger, Coleman, became bookkeeper and controlled the deposit ledger despite prior warnings that the bank’s daily balance and deposit records were significantly behind and difficult to verify.
- Coleman executed a multi-year fraud by manipulating checks and clearinghouse items and by falsifying the deposit ledger through false charges and false additions to totals, making depositor liabilities appear lower than they were.
- The fraud likely could have been detected earlier through careful scrutiny of clearinghouse checks, review of the deposit ledger, or by comparing depositor passbooks with the ledger; the cashier instead relied heavily on the bookkeeper.
- Semiannual examinations by national bank examiners did not detect the fraud, and apparent deposit shrinkage was attributed to innocent explanations.
- The president, Dresser, was not merely a nominal director: he was habitually present at the bank, controlled its affairs, had immediate access to the depositors’ ledger, and received warnings suggesting Coleman’s suspicious conduct, but did not conduct an effective investigation.

## Issues

1. What degree of care do directors and the president of a national bank owe in supervising operations to detect employee fraud?
2. Were the non-president directors negligent and personally liable for losses caused by the employee’s fraud?
3. Was the president, as an active executive officer with warnings, negligent and personally liable for the losses?
4. May interest be awarded on the decree, and if so, from what date?

## Decision

- The Supreme Court held that the required care for national bank directors depends on the circumstances and the subject matter of the duty.
- The Court affirmed dismissal as to the non-president directors, concluding they were not negligent where they relied on the cashier’s reports and examiner oversight and lacked facts requiring personal technical inspection of the deposit ledger or passbooks.
- The Court held Dresser liable, finding that his continuous operational control, access to records, and specific warnings required investigation; his failure to act constituted negligence causing continuing losses.
- The Court approved awarding interest as a discretionary equitable matter and permitted interest from the date of the District Court’s decree.

## Legal Principles

- The standard of care for directors of a national bank is context-dependent and determined by all circumstances rather than by a uniform requirement of detailed audit work.
- Absent suspicious facts, unpaid or nonprofessional directors may reasonably rely on competent officers’ reports and official examiner examinations and are not required to verify technical bookkeeping entries themselves.
- An active bank president or executive officer bears heightened responsibility; when warnings or red flags arise, reliance on others is insufficient and a reasonable investigation is required.
- In equity, interest on a damages decree may be awarded in the court’s discretion, including from the date of an earlier decree when appropriate.

## Conclusion

The Court distinguished between lay directors, who were not liable without circumstances triggering a duty to investigate, and an active bank president, who was liable because warnings and hands-on control required inquiry that would likely have stopped the fraud; it also confirmed that interest may be awarded in equity as a discretionary component of relief.


Bates v. Dresser, 251 U.S. 524 (1920)