Wallace v. Lincoln Sav. Bank

• Decision Date: 14 February 1891
• Citation: 15 S.W. 448,89 Tenn. 630
• Parties: WALLACE v. LINCOLN SAV. BANK et al.
• Court: Tennessee Supreme Court

15 S.W. 448

89 Tenn. 630

WALLACE v. LINCOLN SAV. BANK et al.

Supreme Court of Tennessee.

February 14, 1891

Appeal from chancery court, Lincoln county; GEO. E. SEAY Chancellor.

Lamb & Tillman, for plaintiff.

J. H Holman, Carter, Carmack & Woodard, Bright & Woodard, Carrigan & Higgins, Albert S. Marks, and J. H. Burnham, for defendants.

LURTON J.

This is a bill by a shareholder and creditor of the Lincoln Savings Bank, in behalf of himself and all other shareholders and creditors, against such directors of the bank as held office at different times between the organization of the bank, in 1870, and its suspension, in 1886. Its other defendants are the corporation itself, under its corporate name, and the trustee of the corporation under a general assignment for benefit of creditors made in August, 1886. The bill charges that the defendant directors, by their inattention negligence, and mismanagement, have been guilty of a breach of trust, whereby the bank has been reduced to insolvency, its capital wasted, and the shares rendered worthless. There was a decree in favor of complainant for the use of the corporation against several of the defendants, holding them liable for certain losses sustained through improvident discounts, overchecked accounts, and neglect to bring suits upon matured paper. The decree has been appealed from by complainant and defendants.

Such a bill cannot be maintained by complainant for his peculiar and personal benefit. The wrongs complained of do not especially effect his stock or his demands as a creditor. The negligence of the defendants was in the discharge of duties to the corporation as such, and the corporation, for such negligence, has a right of action. Primarily, therefore, such suit should be brought by the corporation in its corporate name, and only under peculiar circumstances will a creditor or stockholder be permitted, by courts of equity, to bring the suit which the corporation has failed to bring. But where the corporation is disabled from suing, as where the managing agents of the corporation (its officers and directors) are themselves to be the defendants, or where the corporation wrongfully and willfully refuses to sue, then, in either case, a court of equity will entertain a suit by a shareholder, substituting him to the collective or corporate right of action. In either case, it is most obvious that the recovery must be for the benefit of the corporation, all its creditors and shareholders, innocent and guilty, sharing proportionately in the benefit of the decree. The learned chancellor was correct in holding that the decree obtained by complainant inured to the benefit of the corporation, and that complainant was not entitled to any preference or priority over other creditors or stockholders. The assignment of errors on this point by complainant is therefore overruled.

The defendants were not in office at the time this suit was begun. The corporation was not, therefore, disabled from suing by being in the hands and under the control of the parties to be sued. It must therefore appear, before complainant will be suffered to carry on such a suit, that the corporation, or those authorized to represent it, have been requested to sue, and that they have wrongfully refused to bring the suit. It by no means follows that the mere refusal of the corporation to bring a suit will authorize any stockholder dissatisfied with such decision to himself conduct the suit. A very wide discretion is necessarily reposed in the directors of a corporation. It is not the duty of the managers of such association to bring suit upon every supposed wrong or injury to the corporation. If it were so, strangers could never know when a settlement, compromise, or adjustment was a finality, if the matter was subject to be overhauled at the suit of any discontented shareholder. So a suit might appear so desperate, or be so expensive, or, for good reasons, impolitic, that creditors might, in the exercise of a sound discretion, deem it unwise to engage in litigation. In such case, if the refusal be in good faith, the courts will rarely suffer a shareholder to overturn such decision by entertaining his suit for the same cause of action. To authorize his suit, the refusal of the corporation to sue must appear to have been wrongful. Mor. Priv. Corp. § 244. The bill alleges, and the proof shows, that the president of the defendant corporation was duly requested to bring an action in the corporate name against the former directors for the cause of action stated in this bill. This he declined, because he did not deem the facts submitted to him justified such suit. This demand was not laid before the directors then in office, and they have never been requested to sue, nor have they declined to sue. The directors represent the corporation, not the president. The failure to show that a majority of the board had wrongfully refused to bring such suit would be fatal to complainant's right to sue, but for certain facts now to be stated.

In August, 1886, this bank was hopelessly insolvent, and in that situation a general assignment of all its assets was made to the defendant Hancock, a trustee, for the benefit of all creditors; any surplus to be paid over to the corporation. Hancock accepted the trust, and qualified as trustee. Subsequently he was requested to bring this suit, and declined, deeming himself unauthorized. The right of action passed as an asset to the trustee. Hume v. Bank, 9 Lea, 744. After the assignment, he represented the corporation as well as its creditors, and was alone authorized to have sued upon a corporate right of action. This point has been repeatedly settled by other courts. Williams v. Halliard, 38 N. J. Eq. 376; Ackerman v. Halsey, 37 N. J. Eq. 356; Jones v. Johnson, 86 Ky. 530, 6 S.W. 582; Bank v. Caperton, 87 Ky 306, 8 S.W. 885; Brinckerhoff v. Bostwick, 88 N.Y. 52. In the case last cited, the suit was against the directors and officers of an insovent national bank in the hands of a receiver appointed under the provisions of the national banking law. The receiver had refused to sue. The court held that the right of action was in him, and his refusal authorized a shareholder to present a bill in behalf of himself and all other shareholders, the receiver and the corporation being made defendants. The decision was not based upon any of the peculiar provisions of the act of congress concerning effect of appointment of a receiver, or liability of officers and directors of national banks, but was squarely planted upon the general principle governing courts of equity in such cases. We do not think that the trustee of an insolvent corporation would have so wide a discretion as to suing as exists in the directors of a solvent and going corporation. In the case of the refusal of the managers of a corporation, an appeal would lie to the general meeting of shareholders, and, if in such refusal they did not represent the will of a majority, it could be then made to appear, and a board elected who could reverse their action. From the refusal of the trustee there was no appeal save to a court of equity. This case presented on the face of the bill was not frivolous, but was so grave in character, and important in amount, as to have made it the duty of the trustee to have submitted the charge to the decision of court. This bank was organized in 1870, under a private charter granted by this state in 1869. The capital stock was $100,000, all of which was ultimately paid in. Some of the defendants were elected directors in 1870, and by annual re-election continued in office until 1885 or 1886. Others served for very short terms, while still others held office for from one to ten years. They are not charged with any sort of fraudulent collusion. Indeed, no intimation is found in pleadings or proof that any one of them profited, directly or indirectly, by any of the alleged acts of mismanagement or negligence. All of them were stockholders, largely interested in the success of the institution, and all suffered equally with complainant by its disastrous failure. The liability of defendants to the corporation is predicated alone upon the proposition that certain losses sustained by the bank, during its, 15 years of business activity, were the direct consequence of the negligence of defendants while directors. The principal fact constituting this alleged negligence is a charge that a board of directors abdicated their trust by failure to supervise the management and turned over the entire control of the business of the bank to the unlimited discretion and unaided judgment of the cashier; that, as a consequence, the bank has sustained great losses through a series of unwise, indiscreet transactions, engaged in by the cashier without the aid, advice, and supervision of those charged by their selection with the duty of exercising an intelligent judgment in the control of that office. The allegation necessarily is that these transactions, so disastrous in their consequence, would have been avoided, and their losses escaped, but for the negligence and inattention of defendants, in office at the date of the several transactions. The losses, alleged to be a consequence of this breach of duty, may be conveniently classified as follows: First. That there is an unexplained deficit of about $40,000; that the proof of which consists in the fact that the liabilities of the corporation, including its capital stock of $100,000, exceed in amount the nominal value of all assets, good and bad, by the sum stated. This difference between liabilities and nominal assets is charged to be a deficit for which defendants must account. The books of the bank are no part of the record. No balance-sheets are exhibited, and no expert testifies as...