Horn Silver Mining Co. v. Ryan

• Decision Date: 20 December 1889
• Citation: 42 Minn. 196
• Parties: HORN SILVER MINING COMPANY <I>vs.</I> DENNIS RYAN.
• Court: Minnesota Supreme Court

42 Minn. 196

HORN SILVER MINING COMPANYvs.

DENNIS RYAN.

Supreme Court of Minnesota.

December 20, 1889.

Appeal by defendant from an order of the district court for Ramsey county, Simons, J., presiding, overruling his demurrer to the complaint. The action was brought to recover $500,000 damages for defendant's neglect of duty as one of plaintiff's directors, whereby the plaintiff's president and vice-president (who were also directors) were enabled to and did, from time to time, between September, 1881, and April, 1886, loan to themselves and appropriate to their own use, without authority of the board, large sums of money belonging to plaintiff, which they have not repaid, and, being insolvent, are unable to repay. An account of the moneys so unlawfully withdrawn was kept on the company's books, and entries thereof were regularly made. The complaint further shows that plaintiff is a corporation of the territory of Utah; that the misappropriations of money took place at the city of New York; that the board of directors consisted of seven members; that plaintiff was elected a director in 1880 and re-elected in each following year until 1887; that during all this period he had access to the company's books and had knowledge and means of knowledge of the misdoings of its officers with respect to its funds; that he negligently failed to make any effort to prevent such misappropriations of its funds, or to bring them to the notice of the board of directors or of the shareholders; and that he negligently failed to attend at various meetings of the board specified in the complaint. It is also charged, on information and belief, that defendant knew that the misappropriations were being made by the president and vice-president.

R. B. Galusha and C. D. & Thos. D. O'Brien, for appellant.

Lusk & Bunn and Ambrose Tighe, for respondent.

VANDERBURGH, J.

The directors of a corporation are its agents, and occupy a fiduciary relation to it. They are therefore held to the exercise of good faith in all their dealings with the corporation, and in the management of its property; and in relation to their possession or control of the corporate property they are treated as quasi trustees. 3 Pom. Eq. Jur. § 1090. Their relation to the corporation necessarily forbids the use of its property for their own benefit; and for any misfeasance or breach of duty resulting in damage to the corporation they are subject to be called to account by the corporation in the appropriate action.

1. The corporation is the proper party plaintiff in such action, and stockholders can only be allowed to bring an action in exceptional cases, in order to prevent a failure of justice, as where the corporation refuses to sue, or is under the control of hostile directors. Brinckerhoff v. Bostwick, 88 N. Y. 52, 59, 60; Rothwell v. Robinson, 39 Minn. 1, (38 N. W. Rep. 772;) 53 Am. Dec. 646. There is no doubt that the corporation is the proper party plaintiff in this action.

2. The principal objections to the complaint, however, are that the plaintiff's allegations are insufficient to constitute a cause of action, and the non-joinder of the other directors as defendants. The authorities differ in respect to the proper form of action in a suit by the corporation against its directors, — whether all should be joined, whether the suit should be at law or in equity, and also as to the rule or measure of their responsibility. See 15 Am. Law Rev. 182. But we think either form of action may be adopted according to the circumstances of particular cases. Where directors waste or misappropriate the funds or convert assets of the corporation in violation of their trust, or lose them in speculations, a recovery at law may be had against the defaulting directors, while a suit in equity might also be maintained for an accounting, at the election of the corporation. Franklin Fire Ins. Co. v. Jenkins, 3 Wend. 130; Robinson v. Smith, 3 Paige, 222. In Robinson v. Smith, supra, the chancellor declares that the directors of a moneyed corporation who wilfully abuse their trust or misapply the funds of the company, by which a loss is sustained, are personally liable to make good that loss; and they are equally liable if they...