Bates v.
Dresser Issue: Did the failure to take affirmative action to
Topic: Duty of Diligence; the Business Judgment Rule
Background:
This is a bill in equity brought by the receiver of a
national bank to charge its former president and
directors with the loss of a great part of its assets
through the thefts of an employee of the bank while they
were in power. The case was sent to a master who found
for the defendants; but the District Court entered a
decree against all of them. The Circuit Court of Appeals
reversed this decree, dismissed the bill as against all
except the administrator of Edwin Dresser, the
president, cut down the amount with which he was
charged and refused to add interest from the date of the
decree of the District Court. Dresser's administrator and
the receiver both appeal, the latter contending that the
decree of the District Court should be affirmed with
interest and costs.
The receiver of a bank seeks to recover from the
directors and the president the losses sustained by the
bank through the fraud committed by one of the bank
employees during the incumbency of said officers.
Facts:
1. Dresser (Defendant) was the president of a
small bank in Cambridge. The bank had only a
few employees, and defendant supervised all
the work that was done. One of the employees,
Coleman, was promoted from messenger to
bookkeeper in 1904.
2. From 1904 until 1907, there were several small However Dresser is liable for the losses:
shortages in the bank and indications that an
employee was stealing. There was no
indication, however, that Coleman was
dishonest. In 1907, Coleman began using his
access to the books to cover up the thefts he
was making. He did this by altering the records
in such a way that the only way he could be
caught was to examine the deposit record of all
the deposits.
3. During this time, defendant had several
indications that someone at the bank was a
thief. He never attempted to ascertain who the
thief was or to examine the books, even though
he had the opportunity to do so.
4. There was no cage in the bank, and in 1904 and
1905 there were some small shortages in the
accounts of three successive tellers that were
discover the thief amount to a breach of duty to the
corporation?
Held: Yes, as far as the president is concerned, but not
regarding the directors.
 The directors acted reasonably by relying on
the information given to them. They had no
reason to believe that there were any
irregularities in the bank records.
 In the previous semi- annual examinations by
national bank examiners nothing was
discovered pointing to malfeasance. The
cashier was honest and everybody believed
that they could rely upon him, although in
fact he relied too much upon Coleman, who
also was unsuspected by all.
 The question of the liability of the directors in
this case is the question whether they
neglected their duty by accepting the
cashier's statement of liabilities and failing to
inspect the depositors' ledger. The
statements of assets always were correct.
 Their confidence seemed warranted by the
semiannual examinations by the Government
examiner and they were encouraged in their
belief that all was well by the president,
whose responsibility, as executive officer;
interest, as large stockholder and depositor;
and knowledge, from long daily presence in
the bank, were greater than theirs.
 Dresser’s position was different. He was in
the bank daily. He had access to the books at
all times. He knew of shortages and apparent
unexplained declines in deposits, yet he failed
to make any attempt to discover the reasons
behind these peculiar events.
 In 1908 one Fillmore learned that a package
containing $ 150 left with the bank for
safekeeping was not to be found, told Dresser
of the loss, wrote to him that he could not
conclude that the package had been
destroyed or removed by someone
connected with the bank, and in later
conversation said that it was evident that
there was a thief in the bank. He added that
he would advise the president to look after
Coleman
not accounted for, and the last of them, Cutting,
was asked by Dresser to resign on that ground.
Before doing so he told Dresser that someone
had taken the money and that if he might be
allowed to stay he would set a trap and catch
the man, but Dresser did not care to do that and
thought that there was nothing wrong
 However little the warnings may have
 The continued losses were his fault b/c the
 In the same year or the year before, Coleman,
whose pay was never more than twelve
dollars a week, set up an automobile. There
was also some evidence of notice to Dresser
that Coleman was dealing in copper stocks. In
1909 came the great and inadequately
explained seeming shrinkage in the deposits.
pointed to the specific facts, had they been
accepted they would have led to an
examination of the depositors' ledger, a
discovery of past and a prevention of future
thefts.
warnings that he had should have led him to
investigate. Dresser, as president, was much
closer to the operation of the bank than the
directors. He was there every day, and he
supervised the actual operation of the bank.
This the directors didn’t do;