Childs v. White

Hotchkiss, J.: In October, 1910, plaintiff purchased from the domestic business corporation of White, Van Grlahn & Co. $50,000 of its preferred stock at par. In May, 1911, the company was adjudged a bankrupt. By this action plaintiff seeks to recover his loss from defendant, whom he alleges was' continuously a director of the company from its organization in December, 1908, until its failure. In brief, the negligence alleged in the complaint, evidence tending to prove which was given in plaintiff’s behalf at the trial, was, that defendant, knowing the company to be insolvent at its inception, became a director to facilitate the sale of the company’s preferred stock, by giving to the company the benefit of his name and his reputation for wealth and business success; that defendant was negligent in the performance of his duties as director, and permitted one Van Grlahn to manage all of the company’s affairs, including the sale of said stock, which sale was accomplished by false cir- ■ culars, false reports to one or more commercial agencies, the payment of unearned dividends (See Ottinger v. Bennett, 203 N. Y. 554, reversing S. C. on opinion of Miller, J., 144 App. Div. 525), false oral statements made by Van Grlahn personally, and by other deceitful means, of some of which acts defendant had actual knowledge, of others he had notice of facts which should have put him on inquiry, and that as to all, if defendant had conducted himself with reasonable prudence and had he not practically abdicated all and failed to perform any of his duties as director, he would have known the circumstances under which the stock was being sold, and plaintiff would not have been led into the investment and loss of his money. [3] The respondent argues that such an action will not He; that there is no “ privity ” between the plaintiff, a stockholder, and defendant, a director. Of privity in a strict sense, of course there is none. Nor is any necessary. But two elements are ordinarily necessary to sustain an action for negHgence — a violation of duty owing by one to another or to the pubhc, followed by such an injury as is the natural consequence of the negligent act, or which might reasonably have been anticipated to result therefrom. (Per Andrews, Ch. J., Knox v. Eden Musee Co., 148 N. Y. 441, 461, 462.) That directors of corporations owe a certain measure of duty not only to existing stockholders, but as well to those from whom the corporation soHcits subscriptions for its stock or securities, and that they are in that behalf bound to use some degree of both diHgence and care in the performance of such duties as properly pertain to their office, and are Hable for negligence in failing so to do, is a proposition too well established to be now open to dispute. What is due diligence and care varies with the circumstances of each case, and it is impossible to formulate precisely general rules which will cover all states of fact. But that directors are bound to use a reasonable degree of care in the performance of those acts, which, under the circumstances, prudence would fairly seem to require them to perform, is, in the Hght of the authorities, a lenient statement of the rule of law affecting this subject. (See Campbell v. Watson, 62 N. J. Eq. 396, 426 et seq.) The classes of actions in which the duties of directors have been defined have commonly been those based upon deceit, or breach of trust. Some have arisen upon rights of action originally accruing to the corporation but which have been prosecuted in its behalf by stockholders or by receivers; others have been actions brought by stockholders or creditors directly to their own use. But the circumstances under which the action must be pursued in the right of the corporation and those under which it may be brought for the use of the individual plaintiff (See Niles v. N. Y. C. & H. R. R. R. Co., 176 N. Y. 119, 123, 124) suggest no distinction so far as the duties of a director are concerned. While the legal relation which directors occupy toward the [4] foregoing several classes of plaintiffs may not be identical (Briggs v. Spaulding, 141 U. S. 132, 148; Dykman v. Keeney, 154 N. Y. 483, 491), and although the measure of service and attention owing by directors is not the same in all kinds of corporations, there is to be found in many of the reported cases language1 which upon principle is clearly applicable to an action for negligence against one in the situation of this defendant. Thus, in Hun v. Cary (82 N. Y. 65) it was said (p. 71): “When one deposits money in a savings bank, or takes stock in a corporation, thus divesting himself of.the immediate control of his property, he expects, and has the right to expect, that the trustees or directors, who are chosen to take his place in the management and control of his property, will exercise ordinary care and prudence in the trusts committed to them—the same degree of care and prudence that men prompted by self-interest generally exercise in their own affairs. When one voluntarily takes the position of trustee or director of a corporation, good faith, exact justice, and public policy unite in requiring of him such a degree of care and prudence, and it is a gross breach of duty — crassa negligentia —not to bestow them.” In McClure v. Wilson (70 App. Div. 149, 153), in which a receiver of a co-operative life insurance company sought to recover from a director moneys received to the use of the corporation, this court said: “As a director he was chargeable with such knowledge as he gained in that capacity or might have learned by the exercise of reasonable care. He could not blindly shut his eyes to what was transpiring about him and shelter himself behind the claim that he was merely acting in' the interest of a friend and knew nothing of what he was doing.” Upon abundant authority, in People v. Equitable Life Assurance Society (124 App. Div. 714, 731), the same principle of imputed knowledge and responsibility for nonfeasance and acts suffered to be done because of inattention and lack of care, was applied by this court in a statutory action against directors for loss occurring through neglect of duty. The recent case of Rives v. Bartlett (156 App. Div. 552) was an action of deceit against directors for inducing plaintiff to purchase stock of their corporation. If the views there expressed with respect to the duty and responsibility of direct [5] ors are applicable in an action of deceit, they certainly apply to the present case. In short, the books are full of cases defining and applying the obligations under which directors of various classes of corporations rest, including their obligations to prospective as well as existing stockholders and prescribing rules of conduct which it cannot be doubted were violated by this respondent, if he were guilty of all or some of the acts alleged, and to which the evidence of the appellant was directed. In view of the fact that there must be a new trial we refrain from commenting upon the force or effect of the evidence offered at the trial, further than to say that we think it was such as entitled plaintiff to have the questions of fact submitted to the jury and that the direction of a verdict in defendant’s favor was error. The judgment should be reversed and a new trial granted, with costs to appellant to abide the event. Ingraham, P. J., Laughlin and Scott, JJ., concurred; Dowling, J., dissented. Judgment reversed, new trial ordered, costs to appellant to abide event. Order to be settled on notice.