Daniels v. Berry

• Decision Date: 18 January 1929
• Docket Number: 12564.
• Parties: DANIELS et al. v. BERRY et al.
• Court: South Carolina Supreme Court

146 S.E. 420

148 S.C. 446

DANIELS et al. v. BERRY et al.

No. 12564.

Supreme Court of South Carolina

January 18, 1929

Appeal from Common Pleas Circuit Court of Dillon County; E. C Dennis, Judge.

Action by Dargan Daniels and others against E. B. Berry and others. From a judgment sustaining a demurrer to the complaint plaintiffs appeal. Affirmed.

Joe P Lane and W. C. Moore, both of Dillon, for appellants.

Spears & Want, of Darlington, Gibson & Muller, of Dillon, and L. D Lide and M. C. Woods, both of Marion, for respondents.

STABLER J.

In 1925, the Bank of Latta closed its doors and a receiver was appointed to take charge of its affairs. Subsequently, this action was brought against the directors of the bank by the plaintiffs, certain of its depositors, upon the theory that the directors were liable to the plaintiffs, as depositors, for the loss of certain deposits made by them and received by the bank while insolvent. This appeal is from an order of his honor, Judge Dennis, sustaining a demurrer to the complaint.

The allegations of the complaint, for the purposes of the demurrer, are taken to be true, and may be thus summarized: That the Bank of Latta was a corporation duly chartered and organized under the laws of the state, and that the defendants were the qualified and acting directors thereof; that the bank was insolvent from the -- day of --, 1924 to the -- day of February, 1925, at which time its doors were closed and a receiver appointed to administer its affairs; that during this time the insolvent condition of the bank was well known to the defendants, or by the exercise of such diligence as the law requires and required of them as directors should have been well known to them; that the plaintiffs, at different times between the dates named, and while the bank was insolvent, without knowing or being aware of its insolvency, were allowed by the defendants to make certain deposits in the bank, and that each of them at the time of the closing of the bank had on deposit a certain named amount.

The complaint further alleged that since the closing of the institution, the receiver, Berry, had paid out to its depositors, including the plaintiffs, 10 per cent. in the way of dividends, but that the receiver had exhausted the resources of the bank and that nothing further remains to be paid to the depositors, including the plaintiffs.

The sixth paragraph of the complaint is as follows:

"That by reason of the negligence, mismanagement and unlawful conduct of these defendants as directors of said bank in receiving these deposits from the plaintiffs as hereinabove set forth while said bank was insolvent, or in permitting and allowing such deposits to be received by the officers of said bank and openly and publicly holding open the doors of said bank as a sound and solvent banking institution, while the same was insolvent and unsound, these plaintiffs have been damaged in the respective amounts appearing opposite their names above, less, however, ten per cent. thereof, on account of dividends already received by such plaintiffs, as aforesaid. That such loss and damage to these plaintiffs, as aforesaid, was brought about by and resulted from the careless and unlawful acts of the defendants as directors of said bank in receiving said sums from the plaintiffs for deposit, or in permitting same to be received at a time or times when said bank was insolvent, which insolvent condition was well known to said defendants as its directors at the time or times when such deposits were received, as aforesaid, or by the exercise of such case and diligence as was required of them by law as such directors, should have been known to them."

The complaint further alleges that the action was brought in the name of the plaintiffs for the benefit of themselves and all others like situated who may desire to come in and contribute to the costs thereof. The prayer is for judgment against the defendants, and each of them, for the amounts set forth in the complaint and for such other relief as the court may deem just.

From the demurrers printed in the record, it appears that the defendants demurred to the complaint upon two grounds, which may be stated in substance as follows: (1) That the complaint does not state facts sufficient to constitute a cause of action either at common law or under the statute; and (2) that the plaintiffs have no legal capacity to sue.

Judge Dennis, before whom the matter was heard, passed an order sustaining the demurrers. We quote so much of the order as gives the reasons for his conclusions:

"The above matter comes before me on demurrers of the several defendants, challenging the sufficiency of the complaint on the ground that the same does not state facts sufficient to constitute a cause of action. The matter has been fully argued before me by counsel for plaintiffs and defendants. It seems to me to be very clear that the sufficiency of the complaint must be tested by the provisions of Section 3973, Volume 3, of the Code of 1922 (this provision being also contained in the Penal Code, Volume 2, where it is designated as Section 241). Unless a cause of action is set forth within the terms of that statute, I do not think that the plaintiffs can maintain the present action.

"Viewed in this light, it seems to me that the complaint undertakes to state a cause of action that would render the defendants liable to the plaintiffs on grounds and under conditions other than those set forth in the statute, and for this reason I think that the demurrer should be sustained."

The plaintiffs appeal from the court's order and assign error in two particulars: (1) Error in holding that the allegations of the complaint do not state a cause of action under section 3973 of Code 3 of 1922; and (2) error in holding that, the liability imposed by this section being exclusive, the complaint does not state a cause of action independent of and outside of the statute. We shall consider these questions in inverse order .

I. [2] Are the directors of a bank liable at common law to one who deposits money therein after the bank has become insolvent, thereby suffering loss, and if so under what circumstances? Upon well-established principles, there can be no question that in such case, if the deposit is induced by fraud or deceit on the part of the directors, they would be liable. The present case, however, is not grounded on fraud or deceit, but only on passive negligence; and the question at issue therefore is whether, under the common law, a director who negligently allows a deposit of money in an insolvent bank, after he knows or should have known by the exercise of due care that the bank was insolvent, is liable to the depositor suffering loss on account of the insolvency. The answer to this question necessitates an inquiry into the relationship between depositors and directors--whether there is such relationship as would fix liability upon the directors under such circumstances.

In the cases involving this question some confusion has arisen through failure to distinguish clearly between the directors' relationship to the bank itself and that to depositors. Unquestionably directors, as the agents of the bank, owe to the bank itself the duty to exercise ordinary care in the management of its affairs. A violation of that duty would constitute negligence, and the bank, or its receiver when one has been appointed, or the creditors if the receiver should refuse to sue, may bring an action for the benefit of the bank against the directors for such negligence. A violation of the directors' duty to the bank, however, could not give rise to a cause of action in favor of the depositors, and any cause of action which the latter may have must be based upon some violation of a duty owing to them by the directors.

The depositor makes no contract with directors as individuals, his contract being entirely with the bank in its separate entity. Nor can we see any implied contract between the depositor and the directors as individuals, since the directors are only agents of the bank. It is suggested, however, that on account of the status of the parties the directors bear the relation of trustees to the depositors. On this question opinion is divided, but we think the better view to be that directors are not such trustees. Depositors do not deal with the directors but with the bank itself, and the relationship between them and the bank is that of debtor and creditor; under these conditions, we cannot see how there could arise any such relationship between the directors, who are merely agents of the bank, and the depositors as would create the former trustees of the funds of the latter placed on deposit in the bank.

In 3 R. C. L. at p. 469, it is said:

"Aside from constitutional or statutory provisions, the directors or officers of an incorporated bank are not individually responsible, in an action at law, for injury resulting to a creditor or depositor, unless the injury was occasioned by the malicious or fraudulent act of the person complained of. Mere nonfeasance will not answer; nothing short of active participancy in a positively wrongful act intentionally and directly operating to the prejudice of the person complaining will give origin to individual liability. As heretofore shown the better rule is that when the bank incurs losses through the merely negligent manner in which the directors perform their duties, the liability is one which accrues to the corporation, and gives no right of action to the bank's creditors as such."

And at page 474:

"There is nothing of either contract or trust, in all ordinary cases, to create any relation between the depositors of a bank and its directors, and at common law it would seem that...