Ellis v. H.P. Gates Mercantile Co.

• Decision Date: 03 February 1913
• Docket Number: 15,243
• Citation: 60 So. 649,103 Miss. 560
• Court: Mississippi Supreme Court
• Parties: W. C. ELLIS et al. v. H. P. GATES MERCANTILE COMPANY et al

60 So. 649

103 Miss. 560

W. C. ELLIS et al. v. H. P. GATES MERCANTILE COMPANY et al

No. 15,243

Supreme Court of Mississippi

February 3, 1913

APPEAL from the chancery court of Simpson county, HON. R. E. SHEEHY Chancellor.

Suit by H. B. Gates Mercantile Company and others, against W. C Ellis and others. From a decree for complainants, defendants appeal.

The facts are fully stated in the opinion of the court

Affirmed.

Alexander & Alexander for appellants.

The suit is one on the part of creditors or depositors and shareholders of the Magee Bank against its directors seeking to hold the directors personally liable for the losses alleged to have been sustained by reason of the neglect and general mismanagement on the part of the said directors and officers of the bank.

The demurrer to the said bill alleges, among other things, the following grounds:

"The right of action, if any there is, is in the bank, or its receiver, and not in complainants. Mere negligence unaccompanied by actual fraudulent conduct is not ground for action by creditors against the directors of a bank. The bill affirmatively shows that the claim against the directors, if it existed, was an asset of the bank and passed to the purchasers of the assets at public sale."

Defendants specially demurred to so much of the bill as is filed by creditors on the following grounds:

"1. No ground of action in favor of the creditors of the bank is shown.

"2. No deceit is alleged, and if it were the action would have to be at law and by each individual creditor on his own account.

"3. A creditor's bill can lie only where all creditors have a common ground of action, and that is not shown in this case."

Deeming further comment on the nature of this case unnecessary, we will proceed immediately to the discussion of the law of the case.

Hart v Evanson, 105 N.W. 942, 4 L. R. A. (N. S.) 438. This case was an action brought to hold a party liable as a director of a bank for losses which plaintiff sustained as surety upon a bond due to the negligence and mismanagement of the director. The court says (reversing the judgment of the lower court):

"The fallacy which underlies each of the several theories upon which respondent seeks to sustain his right to recover in this action, is the assumption that the directors of a banking corporation owe some duty individually to each creditor of the corporation. That assumption is erroneous. The creditor deals with the corporation and contracts with it, not with the individual directors. The directors are agents or representatives of the entire body of stockholders and the relationship between the corporation and the directors is that of principal and agent. The agency of course implies a trust, but the obligation imposed by the trust are solely to the corporation whose agents and trustees they are, and, like all other agents, they are accountable for their stewardship to their principal alone. Creditors of the corporation are utter strangers to the obligations of the directors to the corporation. Howe v. Barney, 45 F. 668; Bank v. Peters, 44 F. 13; Bailey v. Mosher, 63 F. 488; Briggs v. Spaulding, 141 U.S. 132, 35 L.Ed. 662; Fusz v. Spaulhorst, 67 Mo. 256; Union National Bank v. Hill, 148 Mo. 380; Deaderick v. Bank, 100 Tenn. 457; Zinn v. Mendel, 9 W.Va. 580; Andrews v. Foster, 76 Iowa 535, 41 N.W. 212. The fact that plaintiff has suffered loss as a result of the defendant's action or omission to act does not necessarily give the plaintiff a cause of action against the defendants to recover damages.

"It follows from these propositions, which we deem to be axiomatic, that the plaintiff has not shown any cause of action against this appellant, for the reason that the appellant has not violated any obligation due him to respondent. The complaint does not allege, nor does the evidence show any affirmative, willful misrepresentation of fact by this appellant with intent to deceive. The allegations and proof merely show gross neglect by the defendant of his duties as a director. . . . It it apparent, then, that the finding as to misrepresentation was merely a finding that the defendant passively suffered the bank to continue in business when he knew it was insolvent."

In this bill before the court there are no allegations sufficient to establish an action for deceit, or what is most generally termed "actionable deceit." In fact, the bill alleges nothing more than mere neglect or mismanagement on the part of the directors. In fact, it would be difficult to construe any of the allegations in the bill so as to include fraud in any of its allegations.

In the case of Hart v. Evanson, supra, the court further said:

"Two of the essential elements of actionable deceit are a willful misrepresentation, and an intent thereby to induce another person to alter his position. Whatever may have been the appellant's duty as a director under such circumstances, it was a duty which, in a legal sense, he owed only to the corporation. For his acts or omissions as a director he is answerable only as an agent or trustee to his principal, not to third persons."

In presenting the case before the chancellor on demurrer, the counsel for appellee contends that, since the bill alleged that after the bank became insolvent the directors kept the bank open, sold its stock and received deposits; that this was an allegation that the stock was fraudulently sold and deposits fraudulently received. In other words, that a mere allegation that the directors knowingly received deposits and sold stock when the bank was insolvent was a sufficient allegation of fraud or actionable deceit, thus endeavoring to include in an allegation of gross neglect an inference of willful fraud and intentional injury.

The court said further in Hart v. Evans, supra:

"It is urged that the appellant's conduct as a director was so grossly negligent that the law will infer willful fraud and intentional injury. That argument involves an absurdity. Negligence, whether slight, ordinary, or gross, consists of the want of care, and implies the absence of intentional wrongdoing. Morrison v. Lee, 102 N.W. 223. There are several cases in which a creditor has been permitted to recover damages from directors under circumstances similar to those in the case at bar (citing numerous cases). These cases proceed upon the theory that the directors are trustees for creditors, and individually owe a legal duty to them. For reasons hereinbefore stated, we think that theory is untenable."

We refer the court to the Hart case, supra, 3 L. R. A. 438. Stone v. Rorrman, 183 Mo. 552, 82 S.W. 76; Fusz v. Spaunhorst, 67 Mo. 256; Utley v. Hill, 55 S.W. 1098, 49 L. R. A. 323

In view of these plain expressions of the court upon the proposition of liability for negligence in the management of the business of the bank, we deem it unnecessary to burden this brief with a review of all the authorities on this subject. It is sufficient to say that this conclusion is supported by overwhelming weight of authority. In addition to the cases referred to at length herein note the following:

Hunn v. Cary, 82 N.Y. 65, 37 Am. Rep. 546; Marshall v. Savings Bank, 85 Va. l. c. 684; Morse on Banks & Banking (4 Ed.), sec. 128; Brinckerhoff v. Bostwick, 88 N.Y. 52; Bank v. Hill, 148 Mo. 389; Cock on Stock & Stockholders, 52 Ed., sec. 703; Bank v. Bousseux, 3 F. 817; Williams v. McKay, 40 N.J.Eq. 189.

As alleged in the bill the assets of the bank were sold by the receiver and under the ruling we have just given, these assets passed to the assignees or purchasers, and they alone are entitled to sue. Note the fourth ground of demurrer.

As we have alleged there is quite a distinction between an action for negligence only and an action for deceit. In order for an action of deceit to lie there must be knowledge on the part of the directors. There can be no deceit unless knowledge is averred and proven. Mere statement of negligence and refusal to inform themselves is not sufficient to cover actionable deceit, and when there is an absence of knowledge there can be no deceit. Whether the negligence is slight or gross consists of want of care and implies the absence of intentional wrongdoing or knowledge. In other words scienter is necessary in an action for deceit. 10 Cyc. 843.

We further refer the court to Morse on Banks & Banking (4 Ed.), section 129, page 284.

"If the liability of a director accrues for hishonesty, negligence or incompetency, the claim of the bank against him becomes a part of the assets of the institution, and assignee, receiver, commissioner or other party whomsoever, who may come into the possession of the property is obliged to regard the rights of action against such delinquent directors as a part of the available assets. Neither the stockholders or creditor can sue directors of an insolvent bank to make them personally liable for mismanagement. The receiver, assignee, etc., alone can maintain the action," citing Howe v. Barney, 45 F. 668; Bank v. Peters, 44 F. 13; Bailey v. Mosher, 63 F. 488.

Since counsel for appellee lay great stress upon Blumer v. Ulmer, from Jackson county, recently decided by this court, contending that this case determines, we have procured and examined the supreme court record in Blumer v. Ulmer from Jackson county, the case which it has been contended might sustain the contention that the bill in the case of Gates Mercantile Company v. The Directors of the Magee Bank was good against the demurrer as a bill by creditors to recover damages for deceit.

There are several averments in the bill to the effect that if the directors did not actually know of the insolvency they ought to have known of it, but these do not qualify except in two or three places the positive averments of ...