Emerson v. Gaither
| Decision Date | 15 June 1906 |
| Citation | 64 A. 26,103 Md. 564 |
| Parties | EMERSON v. GAITHER. HARDEN et al. v. SAME. HORNER v. SAME. |
| Court | Maryland Court of Appeals |
Appeals from Circuit Court of Baltimore City; Henry Stockbridge Judge.
Suits by George R. Gaither, as receiver of the American National Bank of Baltimore, against Isaac E. Emerson, against Marshall W. Harden and others, and against Joshua Horner. From decrees in favor of the receiver in each case, defendants appeal. Judgment in the first two cases reversed and remanded, and judgment in the latter affirmed.
Argued before McSHERRY, C.J., and BRISCOE, BOYD, PAGE, PEARCE JONES, SCHMUCKER, and BURKE, JJ.
Vernon Cook and Edgar H. Gans, for appellants.
Robert Lee Slingluff, for appellee.
The appellee was appointed receiver of the American National Bank of Baltimore, and by direction of the Comptroller of the Currency filed this bill against the directors of the bank and the executors and distributees of Frederick Walpert deceased, who was in his lifetime a director. The defendants are sought to be held liable for a number of acts alleged to have been illegal and negligent, those particularly relied on being that they "knowingly suffered and permitted loans to be made in excess of one-tenth of the amount of the capital of said bank, actually paid in," to certain persons and corporations named; that they declared and paid two dividends at times when the bank was in such condition that dividends could not be lawfully declared; and that they permitted the president and cashier to loan the funds of the bank to themselves, their relatives and companies, in which they were interested in excessive amounts. The bill alleges that the bank became insolvent by reason of the negligence and acts of the directors and the losses thereby incurred. Demurrers were filed by several of the defendants, and, they having been overruled, these appeals were taken. The principal questions presented for our consideration are: (1) Has a court of equity jurisdiction to grant the relief prayed? (2) Is the bill multifarious? (3) Is the suit barred as to Frederick Walpert, who died more than three years before the bill was filed, and as to Isaac E. Emerson, who ceased to be a director more than three years before the filing of the bill? (4) Are the allegations sufficient to make the distributees under the will of Frederick Walpert liable?
First. The authorities are not uniform as to how far a court of equity has jurisdiction in suits by corporations, or their receivers, against directors who were guilty of negligence or of acts contrary to some statutory provision. It cannot be denied that there may be charges of mismanagement or negligence, causing loss or injury to the corporation, for which there could be no reason for going into equity; the corporation having a complete and adequate remedy at law. In 3 Clark & Marshall on Cor. § 755, it is said that "the corporation may maintain an action at law against them at common law--an action on the case--to recover damages"; but those authors go on to say: "Or it may maintain a suit in equity when any special ground of equitable jurisdiction exists. as in a case where an accounting or discovery or injunction is necessary." Judge Thompson, in the article written by him on Corporations in 10 Cyc., thus speaks of the subject, on page 836:
The Court of Appeals of New York has gone as far as any court we are aware of in denying the jurisdiction of equity against delinquent directors at the suit of a receiver. It would be difficult to point out any substantial differences between the case of Dykman v. Keeney, 154 N.Y. 483, 48 N.E 894, and the one now under consideration. That case followed O'Brien v. Fitzgerald, 150 N.Y. 572, 44 N.E. 1126, and Empire State Bank v. Beard, 151 N.Y. 638, 45 N.E. 1131. It was conceded that some observations by the judge who delivered the opinion in O'Brien v. Fitzgerald, 143 N.Y. 377, 38 N.E. 371, when that case was first before the court, indicated that such an action might lie in equity, but that was finally determined to the contrary on the later appeal. In Brinckerhoff v. Bostwick, 88 N.Y. 52, the same court said: "The liability of the directors of corporations for violations of their duty or breaches of the trust committed to them, and the jurisdiction of courts of equity to afford redress to the corporation, and in proper cases to its shareholders, for such wrongs, exist independently of any statute." That was a proceeding by a shareholder, and in Dykman v. Keeney it was referred to to show that an action in equity will lie by a shareholder, and it was said that there was "a wide and vital difference between such a case and one where the action is by the corporation against its delinquent directors." There is unquestionably a distinction between the two classes of cases, as a director is an agent of the corporation in its corporate capacity, and he accounts primarily with the corporation, which holds the legal title to the assets; but there is no privity at law between the stockholder and the directors, and hence, when he can sue at all, a court of equity is generally the proper tribunal in which to enforce his rights, which are equitable and not legal, unless the statute gives him the right to proceed at law. But, while we must recognize that distinction, is the corporation, or its receiver, to be denied that right, under such circumstances as are alleged in this bill? There can be no doubt that the opinions delivered in Booth v. Robinson, 55 Md. 419, and Fisher v. Parr, 92 Md. 245, 48 A. 621, indicate that this court has taken a position contrary to the New York cases; but it is contended that the precise question raised by these demurrers was not involved in either of those cases. In Booth v. Robinson, Judge Alvey, after stating that directors in joint stock corporations were not in the strict and technical sense of the term "trustees" for the stockholders, said: He then referred at some length to the case of Charitable Corporation v. Sutton, 2 Atk. 400, and said: "And in Sutton's Case the Lord Chancellor held that directors of a corporation are liable in equity to the corporation, not only for gross frauds and breaches of trust, whereby the assets of the corporation are wasted, but are also liable to the corporation, if the assets of the corporation have been wasted by negligence on their part so gross as to amount to a breach of trust." After referring to Spering's Appeal, 71 Pa. 11, 10 Am. Rep. 684, and other decisions, he added: "They all concur in holding that, in equity, the directors are personally liable for the consequences of their frauds or malfeasance, or for such gross negligence as may amount to a breach of trust, to the damage of the corporation or its stockholders." Then after showing that directors are not responsible for the consequences of mere unwise or indiscreet management, and pointing out the character of proof necessary to render them liable, the opinion proceeds: "In these cases the proper and primary party to complain and call the directors to an account, in a court of equity, for fraud or breaches of trust, in the management of the affairs of the corporation, is the corporation itself, because the duty is owing, and the wrong is done directly to the corporation, and only indirectly to the shareholders." It then points out what is necessary to enable a shareholder to maintain a bill against directors for such fraud or breaches of trust. So, although that was a bill filed by stockholders, the cases cited and the reasoning of the court tend to establish the right of the corporation to sue in equity. The case distinctly holds, not only that directors are in a sense trustees and occupy a fiduciary relation to the corporation and its stockholders, but that their negligence may be so gross as to amount to a breach of trust. Then, in Fisher v. Parr, which was a suit in equity by receivers against directors, Judge Fowler said: "The law appears to be well settled, in this state at least, that a court of equity has jurisdiction to entertain a bill filed by a corporation to enforce the personal liability of directors for the negligent performance of their duties, and that the corporation or its receiver is the proper and primary party to complain and call the directors to an account." It is true that the defendants did not specifically rely upon want of jurisdiction in that case, but some of the grounds of demurrer were broad enough to include that, and the court did in fact pass upon the question. If a court of equity had no jurisdiction to grant the relief prayed, it was idle to remand that case for further proceedings, and it will be observed that the dissenting opinion of the Chief Judge, which was concurred in by Judge Schmucker and the writer of this opinion, not...
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