Deadrick v. Bank of Commerce

• Decision Date: 09 February 1898
• Citation: 45 S.W. 786,100 Tenn. 457
• Parties: DEADRICK et al. v. BANK OF COMMERCE et al.
• Court: Tennessee Supreme Court

45 S.W. 786

100 Tenn. 457

DEADRICK et al. v. BANK OF COMMERCE et al.

Supreme Court of Tennessee.

February 9, 1898

Error to chancery court, Davidson county; H. H. Cook, Judge.

Creditors' bill by one Deadrick and others against the Bank of Commerce Yarbrough, Hill, and others. From the reversal of a decree in favor of complainants by the court of chancery appeals they bring error. Affirmed.

Firman Smith and Douglas Wikle, for plaintiffs in error.

Vertrees & Vertrees, E. H. East, and Geo. T. Hughes, for defendants in error.

BEARD J.

The defendant bank, an ordinary banking corporation organized in 1887 in Nashville, in this state, having become insolvent suspended business, and made an assignment for the benefit of its creditors, in March, 1893. The complainants, who were among its depositors at the time of the suspension, filed this bill to hold some of its directors liable for their lost deposits. The chancellor rendered a decree against the directors for $25,725.34, from which two of them, to wit Yarbrough and Hill, appealed. Upon hearing the cause the court of chancery appeals reversed this decree, and discharged the appellants from all liability. The complainants now assign error on this last decree.

This is a general creditors' bill, brought by complainants, after a demand upon, and a refusal by, the assignee, to institute suit. In it are many charges of fraud, gross neglect, and willful mismanagement upon the part of the directors, particularly "in permitting and sanctioning certain loans to insolvent parties, without proper security whereby the bank was wrecked, by reason of which, it is alleged, they had" rendered themselves individually liable "to complainants" "and such other creditors as saw proper to come in," and avail themselves of these proceedings. The loans complained of, and which formed the basis of the chancellor's decree, were made in 1889, 1890, and the early part of 1891 to W. M. Duncan (one of the organizers of this bank) individually, and to certain firms with which he was connected, and to parties with whom he was more or less intimately associated in business. There is no pretense in the record that the defendants Yarbrough and Hill derived any advantage from these loans, or that they were personally instrumental in securing them for the respective borrowers; on the contrary, it is shown that they were made by the cashier, one C. B. Duncan, a son of W. M. In the progress of the cause in the chancery court there was a reference to a commissioner for a report, among other things, of the facts surrounding these loans. This he accordingly made. This "special commissioner reported, and the chancellor, in his decree, in effect found, that the evidence failed to show that the appellants were guilty of any fraud or willful mismanagement of the affairs of the bank," and the court of chancery appeals say that, "after a careful examination of the evidence in the record, the report of the one and the finding of the other in respect to this point," they are satisfied, "is correct." Continuing, that court say: "It is manifest, from the evidence, that in the first year of this bank's existence its directory paid but little attention to its affairs. The Duncans seem to have dominated. W. M. Duncan was believed to be, and from the record was, then, a man of large means, and he was allowed free access in obtaining loans from the funds of the bank to carry on his speculations and enterprises. While this is true, it is equally true that the other directors in the bank believed with great confidence that he approached the condition financially of a semi-millionaire, and that he was amply good for all his engagements. It appears, however, that in the larger or higher banking circles of the city in 1891 his credit began to wane, but with his own bank people it was 'unquestioned' until several months of 1892 had passed." Concluding on this point, the court of chancery appeals say: "We find much evidence in the record that the loans specifically reported by the special commissioner, and made the basis of the chancellor's decree, were imprudent, and made without that care, caution, and prudence which is ordinarily supposed to govern the action of the prudent business man. But, while this is so," they again say, "we have been unable to discover any proof which, with its fair and legitimate inferences, leads to the belief that appellants are chargeable, as directors, with fraud, or any willful mismanagement of their directory trust, in connection with the renewal or continuance of the loans." Upon this finding by the court of chancery appeals it is clear that, in so far as complainants rest their right to recover upon the statutory liability of these directors to them as creditors of this bank, their bill must fail. The statute on this subject is as follows: "If any director or directors of any of the banks of this state, shall be guilty of any fraud or willful mismanagement of the affairs of such bank, by which any loss shall be occasioned to its creditors, such director or directors, upon legal ascertainment of the fact, shall be individually liable for such loss; and all the stockholders assenting thereto, shall be liable in like manner." Shannon's Code, § 3242.

But it is insisted that this statute does not control this case, and that the liability of the defendant directors rests upon a principle independent of it. The position assumed by the complainants is that the directors of a bank are liable to the corporation for losses resulting to it from their mere negligence in the performance of duties attached to their office; that, upon insolvency, the right of action which has thus accrued to the bank, passes as an asset to an assignee under a general assignment for the benefit of its creditors; that if such assignee, on demand, fails or declines to bring suit to enforce this liability, then these creditors may file a bill in equity for the use of the bank, making proper averments and parties, and recover against the delinquent directors. Is this position sound in reason or upon authority? It is to be noted that we are not now dealing with a case where the assets of a suspended insolvent corporation have been lost to creditors by the negligence of the parties in control, nor with a case where directors have unlawfully or fraudulently appropriated to their own use, or otherwise wrongfully devested, the assets of the bank, but rather with one where the only ground for recovery is that the defendant directors, in a going corporation, at a time when the record fails to show evidences of insolvency, by their failure to exercise that degree of caution in supervising the business of the bank than is "ordinarily supposed to govern the action of the prudent business man," have made it possible for a loss to occur to the corporation through the mismanagement of an officer or officers in direct control of its daily transactions. It is certainly true, as a general proposition, that "the agent's primary duty is to his principal. To him alone

does he stand in the relation of privity and confidence. To him alone does he owe the performance of these duties which are implied from that relation, or which he has expressly assumed, and to him alone is the agent responsible for a failure to perform them. It is, therefore, the general rule that no action can be maintained by third persons against the agent to recover damages for any injury which they may have sustained by reason of the nonperformance or neglect of duty which the agent owes to his principal." Mechem, Ag. § 539. This rule would certainly obtain if the complainants were creditors of an individual insolvent debtor, and were seeking a recovery against the defendants as agents of this debtor, for some loss resulting to their principal from their lack of ordinary prudence in the matter of their agency. Such a claim would be repelled promptly because of the want of the privity relation; upon what higher or better ground do complainants stand in the present suit? A corporation "is a distinct entity. Its affairs are necessarily managed by officers and agents, it is true, but in law it is as distinct a being as an individual is, and is entitled to hold property *** as absolutely as an individual can hold it." Graham v. Railroad Co., 102 U.S. 148; Deaderick v. Wilson, 8 Baxt. 114; Parker v. Hotel Co., 96 Tenn. 252, 34 S.W. 209. And its directors are agents, in the eye of the law, not of the stockholders, but of this legal entity, the corporation. 3 Thomp. Corp. § 4090. The doctrine that they are trustees has been distinctly repudiated in this state in Wallace v. Bank, 89 Tenn. 630, 15 S.W. 448. In that case this court said:...