American Life Ins. Co. v. Powell

• Decision Date: 11 November 1954
• Docket Number: 6 Div. 740
• Citation: 80 So.2d 487,262 Ala. 560
• Parties: AMERICAN LIFE INSURANCE COMPANY et al. v. Richard H. POWELL, Jr., Ex'r et al.
• Court: Alabama Supreme Court

Page 487

80 So.2d 487

262 Ala. 560

AMERICAN LIFE INSURANCE COMPANY et al. v. Richard H. POWELL, Jr., Ex'r et al.

6 Div. 740.

Supreme Court of Alabama.

Nov. 11, 1954.

Rehearing Denied May 19, 1955.

Hugh A. Locke, Birmingham, Noble J. Russell, Decatur, Deramus, Hawkins, Fitts & Mullins, and Lange, Simpson, Robinson & Somerville, Birmingham, for appellants.

Wilkinson & Skinner, Birmingham, for appellees.

SIMPSON, Justice.

This is a bill by two minority stockholders (holders of about one-tenth of one per cent of the outstanding shares) of American Life Insurance Company and alleges a loss to the corporation of over a million dollars due to the misconduct of the management of the corporation. The action is, of course, derivative and on behalf of the corporation.

The managing officers were alleged to be defendants Wert (president and director) and Montgomery (vice-president and director). Hobbs, also a defendant, was treasurer and Autrey, not a party, was agency director, all of the American Company. The bill sets forth that these allegedly unfaithful managing officers, Wert and Montgomery, together with treasurer Hobbs, enriched themselves and profited personally from transactions between American and its customers, most of which transactions were handled by said Autrey; that Autrey split his commissions with Wert and Montgomery on some insurance written and on loans made. Hobbs is alleged to have made a similar arrangement with Wert and Montgomery and to have collected certain unlawful commissions on transactions of American. The other members of the board of directors (a majority) are also made parties defendant. The managing officers, Wert and Montgomery, and treasurer Hobbs are sought to be held liable as trustees ex maleficio of American and the directors are sought to be charged with negligence proximately causing injury and damage to American in the sum of $1,500,000. It is unnecessary to burden the opinion with specifying in detail the various fraudulent transactions alleged. The bill also seeks incidental relief not brought up for consideration by this appeal.

The corporation, of course, is also properly made a defendant. Tillis v. Brown, 154 Ala. 403, 406, 45 So. 589.

The appeal is from an interlocutory decree overruling the demurrers of the several defendants to the bill as last amended. The case has been ably briefed and extensively argued. The right to maintain the bill depends upon the application of certain well-known principles of law to the facts alleged.

We entertain the view that some of the grounds of demurrer were well taken, should have been sustained, and that a reversal of the decree must be ordered.

Discussion will be first addressed to the allegations charging negligence against the individual members of the board of directors (other than Wert and Montgomery). The charge laid to them under the allegations of the bill is simply one in tort. See Blythe v. Enslen, 203 Ala. 692, 85 So. 1, where it was held that such an action was ex delicto, the statute of limitation of one year applying (reaffirmed in 209 Ala. 96, 95 So. 479, and Farmer v. Brooks, 213 Ala. 137, 104 So. 322).

The statement of the rule of liability of the directors to the corporation for such a common law tort so as to render them liable to a personal judgment in an equity suit by a minority stockholder suing for the benefit of the corporation is thus approved in Van Antwerp Realty Corp. v. Cooke, 230 Ala. 535, 538, 162 So. 97, 99:

"The directors owe a duty of managing the corporate affairs honestly and impartially in behalf of the corporation and all the stockholders. They are liable for losses of the corporation caused by their wilful and intentional departures from duty, their fraudulent breaches of trust, their gross negligence, or their ultra vires acts. They are not liable for losses happening through mere mistakes of judgment."

We have a line of cases of rather early origin affirming the foregoing principle in varying phraseology. A good statement is found in King v. Livingston Mfg. Co., 192 Ala. 269, 277, 68 So. 897, 900, where it was said:

'With respect to particular acts within the range of their authority, and subject to their discretion, directors are not liable to the corporation so long as they act in good faith, and without gross negligence which would support an imputation of fraud. Godbold v. Branch Bank, 11 Ala. 191, 199, 46 Am.Dec. 211; Smith v. Prattville Mfg. Co., 29 Ala. 503, 509; Wolfe v. Underwood, 96 Ala. 329, 333, 11 So. 344; Hall v. Henderson, 126 Ala. 449, 28 So. , 543, 61 L.R.A. 621, 85 Am.St.Rep. 53; Tuscaloosa Mfg. Co. v. Cox, 68 Ala. 71; 10 Cyc. 829.'

The averments of the bill, as we read them, are rather contradictory and all too general to meet the standard of the foregoing authorities. There is no sufficient averment aside from mere conclusions to show that the other members of the board of directors (a majority) were so derelict in their duties to the corporation as to indicate bad faith or gross negligence, as defined above, or any intentional wrongdoing. To fasten liability on the directors as for negligence, the bill avers by way of conclusion that they negligently failed to manage and control the business of the corporation during the time they were directors, but delegated the management and control very largely, if not entirely, to Wert and Montgomery and as a proximate result the corporation lost $1,500,000. But the bill specifically states, on the other hand, that these directors were 'business and professional men' having 'numerous and wide interests outside of American Life,' and that the alleged misdeeds of the managerial force were concealed from the stockholders and not disclosed to the directors. In essence, it can be assumed that neither these other directors--presumably men of good character--nor the stockholders were acquainted with or participated in the alleged fraudulent conduct of the management. These allegations, we think, fall short of the requirements of the foregoing authorities in order to fasten liability for negligence--so gross as to 'support an imputation of fraud'--on these other members of the board of directors. Of necessity the actual management of a corporation must be left to some one or more persons who will actively operate the business and as a general proposition it is not to be supposed that the board of directors of a corporation should do so, even though the charter, as usual, vests management in them. From aught appearing there was no willful and intentional departure from duty, fraudulent breaches of trust, such said gross negligence or ultra vires acts attributed to the board of directors, nor it is averred that Wert or Montgomery were known to be incompetent, unfit or untrustworthy to run the business of the corporation. See Farmer v. Brooks, supra. Herein lies one distinguishing feature between the instant bill and that considered in King v. Livingston Mfg. Co., supra. As was indicated in Farmer v. Brooks, supra, and Holloway v. Osteograf Co., 240 Ala. 507(16), 200 So. 197, mere general allegations will not suffice and charges by way of conclusion are subject to demurrer. As stated, in order to fasten liability on the board of directors for the common law tort of negligence toward the corporation, the bill must bring the case within the rule of our cases hereinabove noted by stating with accuracy and clearness the basis of liability claimed by the complainant and not in vague and indefinite terms. We entertain the view, therefore, that that phase of the bill charging negligence against the board of directors other than Wert and Montgomery was demurrable.

It is also contended by appellant that the bill is defective in that it fails to allege that a demand had been made on the directors to bring the action for the corporation or to show any excuse for not making such a demand and that, therefore, the bill is demurrable under the general principle that before equity will entertain a derivative stockholder's action on behalf of the corporation, the complaining stockholder must first seek redress within the corporate body.

However, it is equally well established that a complainant need not show such a demand on the directors when from the bill it is clearly shown that if such a demand had been made it would have met with refusal, the reason being that the law does not require the performance of a vain and useless ceremony.

The substance of the above rules is stated in varying forms in the following Alabama cases: Tuscaloosa Mfg. Co. v. Cox, 68 Ala. 71; Merchants' & Planters' Line v. Waganer, 71 Ala. 581; Nathan v. Tompkins, 82 Ala. 437, 2 So. 747; Memphis & C. R. Co. v. Woods, 88 Ala. 630, 7 So. 108, 7 L.R.A. 605; Tutwiler v. Tuskaloosa Coal, Iron & Land Co., 89 Ala. 391, 7 So. 398; Mack v. De Bardeleben Coal & Iron Co., 90 Ala. 396, 8 So. 150, 9 L.R.A. 650; Roman v. Woolfolk, 98 Ala. 219, 13 So. 212; George v. Central Railroad & Banking Co., 101 Ala. 607, 14 So. 752; Steiner v. Parsons, 103 Ala. 215, 13 So. 771; Id., Ala., 16 So. 6; Bell v. Montgomery Light Co., 103 Ala. 275, 15 So. 569; Bridgeport Development Co. v. Tritsch, 110 Ala. 274, 20 So. 16; Decatur Mineral Land Co. v. Palm, 113 Ala. 531, 21 So. 315; Jefferson County Savings Bank v. Francis, 115 Ala. 317, 23 So. 48; Montgomery Light Co. v. Lahey, 121 Ala. 131, 25 So. 1006; Jasper Land Co. v. Wallis & Carley, 123 Ala. 652, 26 So. 659; Johnson v. National Bldg. & Loan Ass'n, 125 Ala. 465, 28 So. 2; Louisville & N. R. Co. v. Neal, 128 Ala. 149, 29 So. 865; Moseley v. Collins, 133 Ala. 326, 32 So. 131; Johns v. McLester, 137 Ala. 283, 34 So. 174; Montgomery Traction Co. v. Harmon, 140 Ala. 505, 37 So. 371; Crow v. Florence Ice & Coal Co., 143 Ala. 541, 39 So. 401; Gray v. South & North Ala. R. Co., 151 Ala. 215, 43 So. 859, 11 L.R.A., N.S., 581; Tillis v. Brown, 154 Ala. 403, 45 So. 589; Hagood v. Smith, 162 Ala. 512, 50 So. 374; Howze v. Harrison, 165 Ala. 150, 51...