Fisher v. Parr
| Citation | 92 Md. 245,48 A. 621 |
| Parties | FISHER et al. v. PARR et al. |
| Decision Date | 16 January 1901 |
| Court | Court of Appeals of Maryland |
92 Md. 245
FISHER et al.
v.
PARR et al.
Court of Appeals of Maryland.
Jan. 16, 1901.
Appeal from circuit court of Baltimore city.
Action by D. K. Este Fisher and others against Henry A. Parr and others. From a decree sustaining a demurrer to the bill, complainants appeal. Reversed.
Argued before McSHERRY, C. J., and BRISCOE, BOYD, FOWLER, PAGE, PEARCE, SCHMUCKER, and JONES, JJ.
Charles J. Bonaparte and Barnard Carter, for appellants.
Geo. Leiper Thomas, T. Wallis Blakistone, and Richard M. Venable, for appellees.
FOWLER, J. The American Casualty Insurance & Security Company became insolvent, and was placed in the hands of receivers by a decree of the circuit court of Baltimore city on the 23d of November, 1893. By order of court the receivers have instituted several suits, among others the one now before us, to hold the directors of the company personally liable for negligence in the performance of their duties. While proceedings of this character are not frequent, 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. Booth v. Robinson, 55 Md. 419. The demurrer to the bill, therefore, is not based upon the theory that a court of
equity has no jurisdiction over such a case as the bill seeks to make; but the jurisdiction is admitted, and the objection is that the allegations charging negligence and breach of duty are—First, not sufficiently definite; second, that they are, as made, mere inferences of law; and, third, that, independent of a liability for negligence in the performance of their general duties, the directors are not civilly liable for investments made in violation of law.
In order to ascertain what are the foundations and object of this bill, let us look at the bill itself. In several of its paragraphs it is alleged that grossly and obviously illegal Investments of the funds of the company were made by the directors, whereof every member of the board had constructive, if not actual, notice from the records of the corporation itself. Secondly, it is alleged that they made investments of its funds, not only contrary to law, but that such investments were "unsuitable to its business, unreasonably hazardous, insufficiently secured, and such as no ordinarily prudent man, endeavoring conscientiously to discharge his duty as a director thereof, would have sanctioned or approved; and the facts relating thereto, and establishing the impropriety thereof, in a commercial sense, could have been ascertained by all of its directors by the exercise of such reasonable vigilance and activity as were imperatively demanded of them by their obvious obligations as such directors." In a paragraph of the bill prior to those we have just referred to, it is alleged that the executive committee, composed of five directors, adopted a resolution protesting against loans which had been made to William E. Midgley, a stockholder, declaring that such loans are prohibited by the laws of this state, requesting that such loans be returned, and that in the future no other loans be made to any stockholder of the company. At a subsequent meeting of the board of directors on the 28th of July, 1891, this action of the executive committee was overruled and disapproved of. The members of the board comprising the executive committee thereupon, and because their protest was disregarded, resigned, and in their places the defendants were elected as follows: Messrs. Knott, Littig, and Abell on the 28th of July, 1891, and Messrs. McDonald and Parr on the 27th of October, same year. It is also alleged that at various times after the adoption by the board of the resolution refusing to respect the protest of the executive committee, and before the annual meeting of the stockholders held January 10, 1893, "many large loans were made by said corporation, through its finance committee, with the sanction and approval of the board of directors, in direct violation of the laws of the state of Maryland and the terms of its charter, and in disregard of the said lastmentioned protest of its former executive committee." Among the loans thus alleged to have been made were loans to ten Individuals or firms, whose names and the dates of loans are given, amounting to over $500,000. It is further alleged that subsequent to and in addition to the loans above mentioned, from time to time, other loans, giving the dates and amounts, amounting to at least an equal sum, were made, in the same manner and with like violation of the law of the state, to the firm of Beecher, Schenck & Co.; that said firm became insolvent, and there was a loss resulting of nearly $300,000. In addition to these sweeping and specific allegations, the bill further alleges that the several directors who were elected in July and October, 1891, and are named as defendants in this proceeding, remained as such directors during the full term for which they were respectively elected, or so long as the corporation continued to do business, and "are responsible to the corporation, or its receivers, the plaintiffs, for all losses incurred by it through, by reason of, or in consequence of loans or investments of its funds made in violation of its charter, and without such due and reasonable regard to its interest as an ordinarily prudent and careful man would have shown in the conscientious discharge of his duties as its director, and that such among them as ceased to be directors before some or any of the said loans or investments so resulting disastrously to the said corporation had been made are yet responsible for the consequences thereof, when such subsequent loans were made by the agency or through the procurement of directors or officers of the corporation whose unfitness for their respective offices had been already established by their concurrence in or assent to similar violation of its charter or other dereliction of duty on their part in the past, and who were so elected to the offices which they thus abused without full disclosure on the part of their former associates therein of the facts relating to such previous breaches of duty, which facts were either known to the said retiring directors, or could have been and would have been ascertained by them had they made, as it was their duty to make, an ordinarily diligent inquiry into the management and affairs of the corporation during the time of their official connection therewith."
Among the directors who are thus charged with culpable negligence are the defendants in this case. But it must be remembered that the question of fact whether they are thus guilty of the negligent performance of their duties is not before us on this appeal. The sole question now to be considered is whether the bill makes such a case as requires an answer. The demurrer was sustained by the learned judge below, and the plaintiffs have appealed. We will, then, consider whether the bill states a good ground of action arising from an illegal breach of general duty by defendants as directors; second, whether the loans alleged to have been made to stockholders were made in violation of section 69, art 23, of the Code of Public General Laws.
First, however, let us briefly refer to the general principles relating to the duty of directors. Ever since the year 1742, when the leading case of Charitable Corp. v. Sutton, 2 Atk. 400, was decided by Lord Chancellor Hardwicke, the general principles relating to this subject were announced by him as having been generally recognized. In the case of Booth v. Robinson, 55 Md. 419, Judge Alvey, delivering the opinion of this court, says that in the English case just cited the liability of directors to corporations for breaches of duty amounting to breaches of trust is first fully and accurately defined. The following language of Lord Hardwicke is quoted: "Those who are named by corporations to have the direction of their affairs are held to the same care and diligence as factors or agents; and they are answerable, not only for any fraud and gross negligence ivhich they may be guilty of, but also for all faults that are contrary to the care required of them."
What, then, is the care which is required of directors? There ought to be no difficulty about the answer to this question. Directors are selected by the stockholders to manage the concerns of the corporation, and it would seem, therefore, to require no authority, nor, indeed, more than the bare statement of the fact that, as Lord Hatherly said in Credit Co. v. Lord Fermoy, L. R. 5 Ch. 770, "if the directors sleep, instead of being awake, their being asleep would not exempt them from the consequences of not attending to the business of the company." It is not, of course, to be expected that the directors shall attend to the current business; but they must at their peril give such attention to, and so manage, the concerns of the company, that they may be able at all times to know what their executive officers and other agents, as well as their fellow directors, are doing, and how they are acting in respect to the funds and property of the corporation. In Williams v. McKay, 40 N. J. Eq. 189, Chief Justice Beasley said: "I entirely repudiate the notion that this board of managers could leave the entire affairs of this bank to certain committeemen, and then, when disaster to the innocent and helpless cestuis que trustent ensued, stifle all complaints of their neglect by saying we did not do these things and we know nothing about them. * * * The neglectful acts in question cannot be regarded by the court as isolated instances, for they run through the whole period of the life of the institution, and thus evince a systematic and habitual...
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