Warren v. Robison

• Decision Date: 26 April 1899
• Parties: ELIZA WARREN, NETTIE STEVENS, H. J. HOGAN, R. J. HILL, F. T. SANFORD, RICHARD HILL, ALBERT SADD, JOHN BREMAN, JOHN ATKINSON, A. E. SHAW, HYRUM MADDEN, AND JOHN J. CORTEZ, APPELLANTS, v. THEODORE ROBISON, CHARLES M. BROUGH, H. H. SPENCER, GEORGE MURPHY, AD. KUHN, JOHN MAGUIRE, R. A. WELLS, NEWALL BEEMAN, GEORGE W. PERKINS, S. S. SCHRAMM, W. W. COREY, CITIZENS' BANK OF OGDEN, AND J. C. ARMSTRONG, RESPONDENTS
• Court: Utah Supreme Court

57 P. 287

19 Utah 289

ELIZA WARREN, NETTIE STEVENS, H. J. HOGAN, R. J. HILL, F. T. SANFORD, RICHARD HILL, ALBERT SADD, JOHN BREMAN, JOHN ATKINSON, A. E. SHAW, HYRUM MADDEN, AND JOHN J. CORTEZ, APPELLANTS, v. THEODORE ROBISON, CHARLES M. BROUGH, H. H. SPENCER, GEORGE MURPHY, AD. KUHN, JOHN MAGUIRE, R. A. WELLS, NEWALL BEEMAN, GEORGE W. PERKINS, S. S. SCHRAMM, W. W. COREY, CITIZENS' BANK OF OGDEN, AND J. C. ARMSTRONG, RESPONDENTS

Supreme Court of Utah

April 26, 1899

Rehearing denied May 17, 1899.

Appeal from the Second District Court, Weber County, Hon. Wm. M. Mc Carty, Judge.

Action by plaintiffs as stockholders of defendant bank in behalf of themselves and all other stockholders, creditors, and others similarly situated, against defendants for an accounting, and for damages alleged to have been occasioned by reason of negligence in the management by its officers and directors.

From a judgment for defendants, plaintiffs appeal. Modified.

M. D Lessinger, Esq., A. J. Weber, Esq., Elijah Farr, Esq., and Messrs. Bennett, Harkness, Howat & Bradley, for appellants.

The general control and management of all the affairs and transactions of the bank rest with the board of directors. Morse on Banks and Banking, 3d ed., Secs. 115, 116; Reid on Corporate Finance, Secs. 181; Morse on Banks and Banking, 3d ed., Sec. 117; Reid on Corporate Finance, Sec. 299.

Directors are trustees for the stockholders and the bank, and must be vigilant in their trusts, and must not have conflicting interests. Butts v. Woods, 38 Barb., 181; Cumberland, etc., v. Parish, 42 Md. 298.

They must use ordinary diligence in the management of the bank's affairs, and in understanding its resources and liabilities can not be heard to say that they were not apprised of acts, accounts, and correspondence of the bank or which with the exercise of such diligence they might otherwise have known. Gibbons v. Anderson, 80 F 345; Williams v. Mc Kay, 53 Am. Rep. 775; Marshall v. F & M. S. Bank, 17 Am. State Reports, 84.

Directors of banks are bound to constant activity and thorough acquaintance with the daily course of affairs and dealings of the institution. They are bound in law to know the securities of the bank, its bills payable, maturity of its papers, and who are the parties. It is their duty to know the condition of the bank. Reid on Corporate Finance, Sec. 299; Gibbons v. Anderson, 80 F. 345; Houston v. Thurston (N.C.), 29 S.E. 827; Marshall v. F. & M. S. Bank, 17 Am. St. Rep. 84; Martin v. Webb, 110 U.S. 15; Morse on Banks, etc., 3d ed., Sec. 128.

If directors are guilty of gross negligence, and inattention to the duties of their trust, they will be personally liable if they suffer the corporate funds or property to be wasted or lost by reason of such negligence and inattention. Reid on Corporate Finance, Sec. 233; Brinkerhoff v. Bostwick, 88 N.Y. 52; Horn Silver Mg. Co. v. Ryan, 42 Min., 196; Bank v. Bosseiux, 3 F., 817.

Ignorance of any fact in the bank's affairs which it is their duty to know, can never be set up by them in defense or exculpation for any act which the existence of that fact should have prohibited.

When the directors have a duty to perform, and fail to perform that duty, they will not be permitted to plead ignorance. Marshall v. Bank, 17 Am. St. Rep. 84. That the directors are liable, see Williams v. Mc Kay, 40 N. J. Eq., 189; Bank v. Bosseiux, 3 F., 817; Marshall v. Bank, 17 Am. St. Rep. 84.

Messrs. Rogers & Johnson and R. H. Whipple, Esq., for respondent.

The right to maintain this action would in the first instance be in the corporation, by the assignment, that right, the chose in action, passed under the deed of assignment to the assignee, as trustee, and when he was removed, and the receiver appointed, then both the right to sue and the title to the chose in action, or the cause of action, became lodged in him, in trust, together with all other assigned property, which constituted the trust fund, and that fund (under the provisions of the assignment) was held by him, (first) in payment of the expenses of the trust; (second) payment of all creditors of the bank; (and lastly) if there be any surplus remaining, to purchase, as directed by the assignment deed, capital stock of the Utah National Bank, which was to be divided pro rata among the stockholders of the Citizens' Bank.

Even in the absence of such written declarations of trust, the law would have declared the trust fund held, after payment of the expenses of executing the trust, liable; First, for the payment of the creditors of the bank. Mercantile Co. v. Mt. Pleasant Co-op., 13 Utah 213-231.

And, as we have before urged, the receiver succeeded to the corporate rights of action. Terry v. Bamberger, 14 Blatchf., 234; Brouver v. Hill, 1 Sandf., 629; Willink v. Canal Co., 4 N. J. Eq., 377. White v. Haight, 16 N.Y. 310.

Under the theory adopted by plaintiffs, the bank was a necessary party. It was never served with summons or appeared in this action, and, therefore, was never before the court as a party. Defendants' motions for non-suit were, therefore, properly granted on that ground. Brinkerhoff v. Bostwick, 88 N.Y. 52-61; Robinson v. Smith, 3 Paige, 222.

As we have seen, whether or not the defendants in this action were negligent under the circumstances of the case is a question of fact. Even admitting that if upon consideration of the evidence it appears that fair and reasonable minds might reach different conclusions, this court would not reverse the judgment. Wells v. Wells, 7 Utah 68; Dooly Block v. Rapid Transit Co., 9 Utah 31; Mc Kay v. Farr, 15 Utah 261.

Messrs. Marshall, Royle & Hempstead and Messrs. Rogers & Johnson, for respondent Beeman.

The following are well-established rules as to the liability or non-liability of directors:

1. Where directors are clothed with a discretion, they are not responsible to the corporation for damages flowing from an exercise of this discretion, however erroneous their exercise of it may have been.

2. In respect of their ministerial duties, they are not responsible to the corporation for anything short of gross negligence, non-attendance, and fraud. Godbold v. Bank, 11 Ala. 191; 11 Spearing's Appeal, 71 Penn. St.

The leading English cases presenting the above doctrines are: Colt v. Woolaston, 2 P. Williams, 154; Percy v. Millandon, 8 Mart. (N. S.), 68.

The last-named case is quoted with approval in Steamboat v. King, 16 Howard (N. S.), 469; Warton on Neg., Sec., 510; Story on Bailments, Sec. 173.

As the directors impliedly stipulate with the stockholders to give no more than good faith and ordinary or reasonable care. Smith v. Prathville Mfg. Co., 29 Ala. 503; Hodges v. New Eng. Screw Co., 1 R. I., 312.

We call the attention of the court especially to the able work of Thompson on Corporations, Vol. 3, Sec. 4104.

That a director is not liable for the faults or frauds of a co-director appears to be well recognized in New York. Wakeman v. Dalley, 51 N.Y. 27; Arthur v. Griswold, 55 N.Y. 400; Hun v. Carey, 82 N.Y. 65.

BARTCH, C. J. BASKIN, J., and CHERRY, Dist. J., concur.

OPINION

BARTCH, C. J.

This action was instituted by the plaintiffs as stockholders of defendant Citizens' Bank, in behalf of themselves and all other stockholders, creditors, and others similarly situated against the defendants for an accounting, and for damages alleged to have been occasioned, by reason of negligence in the management of the bank, by its directors and officers. It appears that the bank was organized about August 11, 1890, with a capital stock of $ 150,000, and the banking business commenced soon thereafter. It failed and made an assignment for the benefit of its creditors, on December 26, 1893, and afterward a receiver was appointed. The defendants, H. A. Spencer, George Murphy, Ad. Kuhn, John Maguire, R. A. Wells, Newall Beeman, George W. Perkins, S. S. Schramm, and W. W. Corey were directors. W. W. Corey was the first president, and Newall Beeman was the president when the bank failed. The defendant, Theodore Robison, was vice-president and manager, and Charles M. Brough was cashier. J. C. Armstrong was receiver. The transactions, which resulted disastrously to the bank, and which, it is claimed, were made because of the negligence of the directors and officers, are of such a character as to require careful investigation. It is certainly quite startling to notice that a bank in the hands of honest business men, as the directors and officers were reputed to be, should in so short a space of time meet with so many heavy losses as to actually wreck the institution. The losses, it appears from the testimony, began immediately upon the commencement of the business, as is evidenced by the shortage of Barbour, the first cashier, who, although a banker of good reputation, was, it seems, a stranger to the directors. He was placed in charge of the funds of the bank without first having given a bond, as required by the articles of incorporation, in respect to active executive officers, and through the leniency of the directors had given no bond at the time of his death, which occurred about three weeks after the commencement of the corporate business. Then, upon the cash being counted, a shortage of $ 3,600 was discovered which resulted in a total loss. Soon after the organization of the bank, the Anderson Pressed Brick Company, a new corporation, became one of its customers, and loans were made to it, which resulted in a loss to the bank of $ 22,000. That corporation was capitalized at $ 50,000, and one witness said its plant was worth in the neighborhood of $ 45,000, while other witnesses estimated its value to have been, about the time the loans were made, from $ 12,000 to $ 20,000. One of the directors of the bank was also...