Conaty v. Torghen

• Decision Date: 26 March 1925
• Docket Number: No. 5995.,5995.
• Citation: 128 A. 338
• Parties: CONATY v. TORGHEN et al.
• Court: Rhode Island Supreme Court

128 A. 338

CONATY

v. TORGHEN et al.

No. 5995.

Supreme Court of Rhode Island.

March 26, 1925.

Exceptions from Superior Court, Providence and Bristol Counties; Arthur P. Sumner, Judge.

Action by Arthur Conaty, receiver, against Louis Torghen and others. Judgment for plaintiff, and defendant Blistein brings exceptions. Exceptions sustained, and case remitted for new trial, with directions.

Comstock & Canning, Edward M. Brennan, and William A. Graham, all of Providence, for plaintiff.

Cooney & Cooney and George Helford, all of Providence, for defendant Blistein.

BARROWS, J. This is an action of trespass on the case for negligence brought by the receiver of an insolvent corporation against three of its officers jointly, Torghen as president, Blistein as treasurer, and Friedman as secretary. The case was tried to a jury and, at the conclusion of the evidence, the court denied defendants' motion, and granted that of plaintiff for direction of a verdict. Defendant Blistein alone pressed exceptions to the action of the trial court on both motions.

The first and only count of the declaration with which we are now concerned avers the Incorporation in 1907 of the Workingmen's Gemilath Chessed Association for the mutual assistance of its members; that its assets consisted exclusively of weekly cash deposits by members; that loans were to be made to members only and by check jointly signed by three officers, the president, secretary and treasurer; that business periods called "cycles" covered two years, and at the end of each cycle a distribution took place of all funds accumulated. The count further alleges that payments, made as above, were to be deposited in a proper bank or lent to members in accordance with the rules and states the wrongful act of the officers to have been that they "failed to examine the corporate activities of each other in collecting, depositing, or lending the money" and "so carelessly and fraudulently mismanaged" corporate affairs as to show a loss of $18,000 in the cycle between October, 1918, and October, 1920.

The evidence showed that in 1909 Friedman became secretary; that thereafter he substantially was in sole control of the corporation; the society became commonly known as "Friedman's money society"; no meetings of the corporation were held; no officers were elected; no written by-laws or rules existed. There is nothing in the evidence to show whether meetings ever had been held, officers elected, or by-laws or rules adopted by the corporation. Some rules as to loans and withdrawals were promulgated by Friedman alone and printed in members' pass books. The rules were followed or not as he saw fit. Decisions as to whom loans should be made came from Friedman without consulting any one.

Friedman, from time to time, designated two other members to act as president and treasurer, respectively. Their only active duty appears to have been to sign checks, signatures of three officers of the society being required by the Westminster Bank in which the funds were deposited. If the scheme of lending were strictly followed, the society would have had at all times sufficient funds on hand to make the loans for which members were entitled to ask and, as all loans were admittedly paid, the society would not have been insolvent without negligence or worse on the part of those responsible for its funds.

In the cycle from 1916 to 1918 Blistein was named president by Friedman, and was a joint signatory to all checks. In the cycle starting in October, 1918, one Hodosh was treasurer until October 28th, at which time Friedman told Blistein to act as treasurer and appointed defendant Torghen as president. None of the officers received compensation for their services, and the president had no supervision of the collecting of dues or management of the society. His only function was to sign checks with the treasurer and secretary. The collection and depositing of dues was substantially all done by Friedman. Vouchers at the end of each month were returned to Friedman and never seen by others. We are not, however, concerned with the deposits for the receiver's present claim, as stated by his counsel in argument, concerned only money which actually got into the bank and out again on checks jointly signed by all three officers.

All shareholders during the cycle 1916-1918 received full repayment in October of the latter year. It is not clear, however, that these payments were made entirely from member's dues paid during that cycle. During the following cycle with which the declaration deals, there is some evidence of a forged note for $1,300, and of at least one forged check for $200, but most of the checks issued are shown on Friedman's book. Some of the canceled checks have disappeared, and Friedman claimed he was unable to produce them. A statement from the Westminster Bank of the deposits and checks drawn from October 7, 1918, to October 22, 1920, was presented in evidence. There is some dispute whether this statement shows individual checks or in some instances only total withdrawals on the date indicated. It does not show who the payees were.

The statement shows, among payments made by the bank, the following: October 14, 1918, $484.12; same date, $229.12; same date, $5,242.69; October 17, $1,038.25; November 13, 1919, $2,345.44; December 1, 1919, $2,300.60; April 29, 1920, $2,001.55. Checks for these payments have not been produced by Friedman, nor do his books show to whom they were payable. It is significant, however, that the 1916-1918 cycle ended Sunday, October 6, 1918, and that according to the usual course of business checks for distributive shares would be passed out to members on Sunday, October 13. It was, therefore, possible that the payments shown by the bank on October 14 and 17 were legitimate payments on account of the preceding cycle.

Business continued as usual from October, 1918, to October, 1920. Friedman then, as in former cycles, figured the amount due to each shareholder for the cycle just closing and brought the checks to Blistein and Torghen for their signatures. The checks were signed and distributed, about October 13, 1920, and after a few had been paid the balance began to come back from the bank marked "no funds." Among such dishonored checks Blistein and his immediate family held nearly $3,400 worth. About this time Friedman disappeared for a few days. He was in New York but for what purpose he refuses to state on the ground that it might incriminate him. On his return, about October 20, at a stormy meeting of the shareholders at which Blistein was present, Friedman told them that he had used the society's money to buy stock and that he had "gambled it away like a drunken sailor," but that if they would give him time he would try to pay it all back and see that no one lost anything. Then followed the receivership and by stipulation at the outset of this trial the amount of the claims filed by members with the receiver was agreed upon as the loss which the corporation had suffered. These total $12,935.50.

The theory upon which the trial court acted was that the evidence showed that at least $12,935.50 had been paid to the corporation, had been placed in the bank, and could only have been withdrawn by the joint signatures of all three officers; that said defendants were de facto officers; that the money had been withdrawn, and that as no testimony showed to whom it had gone, a prima facie case was thereby made out against defendants; that the burden of proof was upon the officers to explain its disappearance and that, they having failed to so do, joint gross negligence must be inferred against all and a verdict directed for plaintiff for the amount of loss to the corporation.

We think the court was correct in holding the defendants to be de facto officers of the corporation, but it does not follow that a verdict should have been directed. In a negligence case a directed verdict for plaintiff is something of a rarity. Some courts refuse ever to so act on oral testimony, holding that the weight of evidence is always in the first instance for the jury. 20 R. C. L. p. 1074, 79. The test as to whether a verdict should be directed has been laid down by this court, speaking through Durfee, C. J., in Clarke v. R. I. Electric Lighting Co., 16 R. I. 463, 466, 17 A. 59, 60. It is:

"Whether the facts be disputed or not, if they are such that different minds, fairly considering them, might draw different conclusions from them, the question of negligence is for the jury."

In this case, therefore, the real test in passing upon the correctness of the action of the trial justice in directing a verdict for the plaintiff is whether, on the evidence, the only reasonable conclusion was that all three defendants were jointly liable for the shortage.

The basis of liability for negligent acts of directors or officers of a corporation is neglect of duties imposed upon them. Briggs v. Spaulding, 141 U. S. 146, 11 S. Ct. 924, 35 L. Ed. 662; North Hudson Bldg. & Loan Association v. Childs et al. 82 Wis. 460, 52 N. W. 600, 33 Am. St. Rep. 57. The question is also very fully discussed in Campbell v. Watson, 62 N. J. Eq. 396, 50 A. 120. No distinction exists between the...