Pittsburgh Steel Co v. Davidson Hardware Co

• Decision Date: 01 May 1918
• Docket Number: (No. 389.)
• Parties: PITTSBURGH STEEL CO. v. DAVIDSON HARDWARE CO. et al.
• Court: North Carolina Supreme Court

95 S.E. 896

PITTSBURGH STEEL CO.

v.DAVIDSON HARDWARE CO. et al.

(No. 389.)

Supreme Court of North Carolina.

May 1, 1918.

Appeal from Superior Court, Davidson County; Harding, Judge.

Action by the Pittsburgh Steel Company against the Davidson Hardware Company and others. Prom judgment for plaintiff, defendants appeal. No error.

The action was to recover of defendant the Hardware Company the balance due on a debt for goods sold and delivered to said defendant company by plaintiff, and chiefly to Charge the individual defendants, Shemwell and Young, with a portion of said claim on the ground, and to the extent that, being directors and officers in charge of defendant company's business, they had wrongfully diverted its assets for their own protection and benefit, and to the prejudice of plaintiff's legal rights. On denial of liability by said individual defendants, there was verdict for plaintiff to the amount against them for S::77.04. Judgment on the verdict, and said defendants excepted and appealed.

Raper & Raper, of Lexington, for appellants Shemwell and Young.

C. L. Shuping, of Greensboro, and Walser & Walser, of Lexington, for appellee.

HOKE, J. [1] It is the recognized position with us that the directors of corporations, and more especially when, as officers, they are in the active charge of the business, are to be considered to a certain extent as trustees in respect to their corporate management and their business dealings with the corporate property, and, in case of insolvency, they will not be allowed to take advantage of their position to obtain a preference for themselves at the expense of creditors or other shareholders, either in the acquisition of rights or in relief from liabilities which they may have incurred either as principal or sureties. Wall v. Rothrock, 171 N. C. 388, 88 S. E. 633; Whitlock v. Alexander, 160 N. C. 465, 479, 76 S. E. 538; Pender v. Speight, 159 N. C. 612, 75 S. E. 851; McIver v. Hardware Co., 144 N. C. 478, 57 S. E. 169, 119 Am. St. Rep. 970; Graham v. Carr, 130 N. C. 271, 41 S. E. 379; Hill v. Lumber Co., 113 N. C. 173, 18 S. E. 107, 21 L. R. A. 500, 37 Am. St. Rep. 621; Townsend v. Williams, 117 N. C. 330, 23 S. E. 461. In the Wall Case, supra, the general principle is well stated as follows:

"But the directors, occupying a fiduciary relation, are not permitted to secure themselves against pre-existing liabilities of the corporation upon which they are already bound, or for money they may have already loaned, when the corporation is in declining circumstances and verging on insolvency. They cannot be permitted to take advantage of their intimate knowledge of the corporation's affairs for their own benefit at the expense of the general creditors."

And in Pender v. Speight: "It is the duty of the directors of a corporation as trustees of its property for the benefit of its creditors and shareholders, to administer the trust for the mutual benefit of the parties interested, and for them to receive therein an ad vantage to themselves not common to all is a plain breach of the trust imposed."

And in illustration of the principle it was held in Graham v. Carr, supra:

"That a director of an insolvent corporation, being a surety for the payment of corporate debts, cannot apply the proceeds derived from a sale to him of corporate property to the payment of such debts."

Again in the second Whitlock Case: "The directors were required to surrender a mortgage they had placed upon the corporate property and by means of which they had raised money to pay off corporate debts upon which they were sureties."

Whether the inhibition referred to is made to rest in strictness on the existence of a fiduciary relationship, or on the ground of fraud, a position approved in some of the cases (Clark on Corporations, p. 608), it is very generally held in this country that a breach of duty in the respect suggested is properly considered a legal wrong, for which the officers participating, and at times when in negligent default, may be held to an accounting to the extent that their misconduct has caused pecuniary damage to other creditors. Mclver v. Hardware Co., supra.

In the present case there is evidence on the part of plaintiff, and, construed in reference to the charge, the jury in their verdict have established, that the defendant corporation was a company doing hardware business in Lexington, N C, having a paid-up capital of $15,000 or more, and in which defendant Dermot Shemwell was president, one of the three directors, and stockholder to the amount of $4,500; that a second director, J. E. Foy, also held stock to the amount of $4,500, and the remainder of the said stock, to the amount of $6,000 or $7,000, was held by the third director, defendant B. C. Young, who was vice president and secretary and treasurer of the company; that in May, 1913, finding they were in debt to various parties to an amount aggregating $30,000, the officers in charge, Shemwell and Young, under authority conferred, sold the stock of goods in bulk to a...