Chadwick v. Holm

MORGAN, J. On November 4, 1907, the directors of the Snake River • Canal Company passed a resolution that a meeting of the stockholders be called and a transfer of the system of the canal company to the Snake River Valley Irrigation District be recommended, each stockholder to receive his proportion of the bonds of the district to be given in payment for the system. On November 16, 1907, the stockholders’ meeting was held and the recommendation of the board of directors was adopted. On December 14, 1907, the directors again met and decided to convey the system of the canal company to the district for the sum of $178,750, payment to be in bonds of the district in such denominations that each stockholder of the canal company might receive his proportionate share. In July, 1908, the transfer was completed, the bonds of -the district were received; and, in January, 1909, were allotted to the stockholders of the canal company, and most of them were delivered. The bonds allotted to respondents were not delivered, but were held for the reason, as it appears, that their stock was held as security by other parties. These bonds were intrusted, by the directors, to one Mickleson, secretary of the canal company, who embezzled them and converted them to his own use. It appears that Mickleson’s default was not known to the directors until December, 1910. Respondents instituted this [255] action against the canal company and its directors to recover the value of the bonds allotted, but not delivered to them, and based their claims upon the alleged negligence of the directors in permitting the bonds to be stolen. The jury returned a verdict in favor of the several plaintiffs, amounting to $11,242.50, judgment was entered accordingly, and from the judgment this appeal is taken by the defendants, who were directors of the corporation. Appellants deny the right of respondents, as stockholders, to bring this action in their name, and have cited many authorities to sustain this contention, but in each of the cases cited a stockholder sued the directors to recover for losses to the corporation . occasioned by their negligence, and it was held that the loss was that of the corporation and not of the stockholder, even though his shares of stock decreased in value as a result, and hence the corporation should bring the suit. In this action, stockholders are not seeking to recover a proportionate amount of what is due the corporation as a result of appellants’ negligence, but they claim the bonds were theirs because of the allotment of' the same to them by the corporation. There can be no doubt that the stockholders’ consent to the recommendation of, and action by, the directors, to transfer the property of the canal company was based upon the consideration that the bonds be properly distributed to them.. Upon that theory respondents were the proper parties to bring the action. It is contended by appellants that the bonds were not the property of respondents, but of the corporation; that, because the corporation has never been legally dissolved, the action of the directors in allotting them was null under the provisions of sec. 2732, Rev. Codes, which is as follows: “The directors of corporations must not make dividends, except from the surplus profits arising from the business thereof; nor must they divide, withdraw, or pay to the stockholders, or any of them, any part of the capital stock; nor must they reduce or increase the capital stock, except as in this title specially provided. For a violation of the provi [256] sions of this section, the directors, under whose administration the same may have occurred (except those who may have caused their dissent therefrom to be entered at large in the minutes of the directors at the time, or, when not present, when the same did occur), are, in their individual and private capacity, jointly and severally liable to the corporation, and to the creditors thereof, in the event of dissolution, to the full amount of the capital stock so divided, withdrawn, paid out or reduced. There may, however, be a division and distribution of the capital stock of any corporation which remains after the payment of all its debts, upon its dissolution or the expiration of its term of existence.” This statute was enacted for the benefit of creditors of, and those who engage in business with, corporations on the assumption that their capital is unimpaired, and of stockholders, who have a right to insist that the corporation continue in business, but not for the protection or advantage of directors who have violated its express terms. In this case objection to the allotment or distribution of the bonds has not been made by a creditor, all the stockholders have agreed to it, and, it is alleged in the answer, the canal company has had no interest in, or control over, the bonds since the allotment thereof to the stockholders and delivery to Mickleson for their use and benefit. (In re Wilson’s Estate, 85 Or. 601, 167 Pac. 580.) As against the directors the allotment of the bonds was valid, and, being allotted to respondents, became their property, and they, not the corporation, should sue to recover for their loss. These appellants were directors from the time the bonds were received and placed with Mickleson until they - were stolen. There is conflict in the evidence as to whether or not the bonds were placed with Mickleson with respondents’ consent, but the jury found in their favor in this respect,- and its finding will not be disturbed. In view of the allegations of the complaint and the denials and affirmative allegations of the answer, the court is concluded upon the question of ownership -of the bonds claimed [257] by respondents after tbe allotment thereof. The corporation very properly retained possession of the bonds of respondents in order to protect itself from a contingent liability which might arise in ease the owners of the stock should at some time demand their rights to water based on the ownership thereof. It was the duty of the corporation to use reasonable care and diligence to keep safely the bonds of respondents until the exchange could be made. Clearly the corporation is liable for negligence resulting in the loss of the bonds. The appellants are charged in the complaint, with the corporation, as joint tort-feasors. So far as respondents are concerned, appellants may be regarded as agents of the corporation, and, if their negligent acts contributed to the loss of the bonds, they are jointly and severally liable with the corporation. (2 C. J. 903.) The evidence shows that the directors placed these bonds in the hands of Mickleson, the secretary, and from the time they were so delivered until they were stolen, they were in his possession, although the corporation had a treasurer who had given a bond for the faithful performance of his duty and Mickleson had given none. During all this time the members of the board never satisfied themselves, except by taking Mickleson’s word, that the bonds were safe. This evidence was sufficient to sustain the finding of the jury that the bonds were stolen and lost through appellants’ negligence. (7 R. C. L. 478; Fletcher v. Eagle, 74 Ark. 585, 109 Am. St. 100, 86 S. W. 810; Marshall v. Farmers’ etc. Savings Bank, 85 Va. 676, 17 Am. St. 84, 2 L. R. A. 534, 8 S. E. 586; note to Bosworth v. Allen. 55 L. R. A., at p. 766.) . The judgment is affirmed and costs are awarded to respondents. Rice, J., concurs. Chief Justice Budge sat with the court at the hearing but thereafter discovered, upon an examination of the record, that he is related to one of the parties litigant, whose name does not appear in the title as shown upon our docket. Deeming himself disqualified, for this reason, he did not participate in the decision.