Barnes v. Andrews

• Decision Date: 07 March 1924
• Citation: 298 F. 614
• Parties: BARNES v. ANDREWS.
• Court: U.S. District Court — Southern District of New York

298 F. 614

BARNES v. ANDREWS.

United States District Court, S.D. New York.

March 7, 1924

George W. Alger and Brainard Avery, both of New York City, for plaintiff.

George Gordon Battle and Origen S. Seymour, both of New York City for defendant.

LEARNED HAND, District Judge (after stating the facts as above).

This cause may be divided into three parts: First, the defendant's general liability for the collapse of the enterprise; second, his specific liability for overpayments made to Delano; third, his specific liability for the expenses of printing pamphlets and circulars used in selling the corporate shares.

The first liability must rest upon the defendant's general inattention to his duties as a director. He cannot be charged with neglect in attending directors' meetings, because there were only two during his incumbency, and of these he was present at one and had an adequate excuse for his absence from the other. His liability must therefore depend upon his failure in general to keep advised of the conduct of the corporate affairs. The measure of a director's duties in this regard is uncertain; the courts contenting themselves with vague declarations, such as that a director must give reasonable attention to the corporate business. While directors are collectively the managers of the company, they are not expected to interfere individually in the actual conduct of its affairs. To do so would disturb the authority of the officers and destroy their individual responsibility without which no proper discipline is possible. To them must be left the initiative and the immediate direction of the business; the directors can act individually only by counsel and advice to them. Yet they have an individual duty to keep themselves informed in some detail, and it is this duty which the defendant in my judgment failed adequately to perform.

All he did was to talk with Maynard as they met, while commuting from Flushing, or at their homes. That, indeed, might be enough, because Andrews had no reason to suspect Maynard's candor, nor has any reason to question it been yet disclosed. But it is plain that he did not press him for details, as he should. It is not enough to content oneself with general answers that the business looks promising and that all seems prosperous. Andrews was bound, certainly as the months wore on, to inform himself of what was going on with some particularity, and, if he had done so, he would have learned that there were delays in getting into production which were putting the enterprise in most serious peril. It is entirely clear from his letters of April 14 1920, and June 21, 1920, that he had made no effort to keep advised of the actual conduct of the corporate affairs, but had allowed himself to be carried along as a figurehead, in complete reliance upon Maynard. In spite of his own substantial investment in the company, which I must assume was as dear to him as it would be to other men, his position required of him more than this. Having accepted a post of confidence, he was charged with an active duty to learn whether the company was moving to production, and why it was not, and to consider, as best he might, what could be done to avoid the conflicts among the personnel, or their incompetence, which was slowly bleeding it to death.

Therefore I cannot acquit Andrews of misprision in his office, though his integrity is unquestioned. The plaintiff must, however go further than to show that he should have been more active in his duties. This cause of action rests upon a tort, as much though it be a tort of omission as though it had rested upon a positive act. The plaintiff must accept the burden of showing that the performance of the defendant's duties would have avoided loss, and what loss it would have avoided. I pressed Mr. Alger to show me a case in which the courts have held that a director could be charged generally with the collapse of a business in respect of which he had been inattentive, and I am not aware that he has found one. In Bowerman v. Hammer, 250 U.S. 504, 39 Sup.Ct. 549, 63 L.Ed. 1113, the defendant was held for specific illegal loans, made by the president; so also in Kavanaugh v. Commonwealth Trust Co., 223 N.Y. 103, 119 N.E. 237. In Briggs v. Spaulding, 141 U.S. 132, 11 Sup.Ct. 924, 35 L.Ed. 662, a case decided by a narrow margin, which to-day would probably have gone the other way, the only attempt to charge the defendant was upon specific loans. Even in Hun v. Cary, 82 N.Y. 65, 37 Am.Rep. 546, it was for a single foolish investment that the defendant was held. The report of Allen v. Roydhouse (D.C.E.D. Pa.) 232 F. 1010, is not full enough to ascertain just what the verdict included, but apparently it, too, was for specific losses due to improper investments, and the same was true in Robinson v. Smith, 3 Paige (N.Y.) 222, 24 Am.Dec. 212.

When the corporate funds have been illegally lent, it is a fair inference that a protest would have stopped the loan, and that the director's neglect caused the loss. But when a business fails from general mismanagement, business incapacity, or bad judgment, how is it possible to say that a single director could have made the company successful, or how much in dollars he could have saved? Before this cause can go to a master, the plaintiff must show that, had Andrews done his full duty, he could have made the company prosper, or at least could have broken its fall. He must show what sum he could have saved the company. Neither of these has he made any effort to do.

The defendant is not subject to the burden of proving that the loss would have happened, whether he had done his duty or not. If he were, it would come to this: That, if a director were once shown slack in his duties, he would stand charged prima facie with the difference between the corporate treasury as it was, and as it would be, judged by a hypothetical standard of success. How could such a standard be determined? How could any one guess how far a director's skill and judgment would have prevailed upon his fellows, and what would have been the ultimate fate of the business, if they had? How is it possible to set any measure of liability, or to tell what he would have contributed to the event? Men's fortunes may not be subjected to such uncertain and speculative conjectures. It is hard to see how there can be any remedy, except one can put one's finger on a definite loss and say with reasonable assurance that protest would have deterred, or counsel persuaded, the managers who caused it. No men of sense would take the office, if the law imposed upon them a guaranty of the general success of their companies as a penalty for any negligence.

It is indeed, hard to determine just what went wrong in the management of this company. Any conclusion is little better than a guess. Still some discussion of the facts is necessary, and I shall discuss them. The claim that there were too many general employees turned out to be true, but, so far as I can see, only because of the delay in turning out the finished product. Had the factory gone into production in the spring of 1920, I cannot say, and the plaintiff cannot prove, that the selling department would have been prematurely or extravagantly organized. The expense of the stock sales was apparently not undue, and in any event Andrews was helpless to prevent it, because he found the contract an existing obligation of the company. So far as I can judge, the company had a fair chance of life, if the factory could have begun to turn out starters at the time expected. Whether this was the fault of Delano, as I...