North Hudson Mutual Building & Loan Ass'n v. Childs

Pinkey, J. 1. The corporation plaintiff has a remedy •against its directors and officers for negligence, fraud, .breaches of trust, or for acts done' in excess of their authority, and the case against each is distinct, depending upon the evidence against him, unless two or more have joined or participated in the wrongful act, in which case all participants may be joined in the suit. And where the act is illegal or in violation of some positive law, the authorities indicate that there is no right of contribution where one only is sued and charged; and therefore it is held in many cases that it is not necessary to make all the •directors parties who have more or less joined in the act complained of. Thomp. Liab. Off. Corp., in notes 352, 353, 411, and cases cited. A different rule is maintained in the modern cases in England and America, in cases where the .wrongful act is the result of negligence or gross misjudgment and is not, in and of itself, illegal or a violation of some positive law, as will be shown hereafter; and there exists high authority in such cases for holding that in all* cases where contribution would be allowed in equity, there those who are liable to contribute are necessary parties to a. suit in equity to obtain redress for the loss which, the corporation has suffered. The remedy of the corporation for — 473 — the wrong clone is either at law or in equity, according to the nature of the case. Hence, in every such case as the present it is important to determine at the outset whether the action shall be or is a legal or equitable one, and, if the latter, whether the necessary parties are before the court to enable it to make a proper and complete determination of the controversy. This action has been treated throughout by the plaintiff and by the circuit court as a legal action, both in the demand for judgment and in the course taken at the trial, a trial by 'jury having been waived, and the court ruling that no evidence of liability was competent that did not equally affect both defendants; and, after judgment, by the remission of damages for the periods mentioned, on the ground that for these sums the defendants were not jointly liable, though this fact was either overlooked or was not regarded in the decision of the case. 2. The complaint is not entirely definite and clear in the allegations upon which the liability of the defendants is rested, but groups together grounds not entirely congruous when stated in the same cause of action, as the charge against them is- gross neglect, mismanagement, and inattention of the defendants “to the duties of their said offices,” and they are, to some extent at least, attempted to be charged for negligence or misconduct in their respective offices of president and treasurer, and also as members of the board of directors, the by-laws making them ex officio such. Some of the acts as to which negligence and misconduct are predicated lie wholly outside the scope of the duties of either one or both the president and treasurer. In the main, the gravamen of the case seems tó be that the defendants have exceeded their respective powers as such, president and treasurer, in dealing with the property and property rights of the plaintiff, and have usurped the powers of the board of directors in these respects; and it is expressly charged in the 7th, 9th, 10th, 11th, 12th, 13th, and — 474 — 14th causes of action (so designated) that they did the acts complained of “ without the knowledge, consent, and approval of the board of directors; ” and the last of these causes of action, grouping the plaintiff’s losses in one aggregate sum of $22,000, charges “that between the 1st of March, 1882, and the 1st of September, 1887, the plaintiff, through the gross neglect, mismanagement, and inattention of the defendants to the duties of their said offices, has lost in dues, interest, and charges on stocks and loans, and on loans made by defendants, and in the wrongful cancellation of stock by the defendants, and paying thereon more than the holders thereof were entitled to receive and be paid by said corporation, and without the knowledge, consent, or authority of the board of directors of said corporation, and without the knowledge, consent, or authority of the stockholders thereof, to the amount of $22,000.” The first five causes of action (so designated) proceed entirely upon the ground of gross neglect and mismanagement of the defendants, and there are items also in the other causes of action based on that ground. The circuit court based the finding against the defendants on the ground “ of gross negligence and usurpation of authority not given them by the by-laws, but reserved to the board of directors.” These different allegations thus blended in the several so-called causes of action, which are in fact but enumerations of items of liability under what is really but one general count, require different answers and different evidence to meet them, creating difficulties of procedure which can be best dealt with and overcome in an equitable action. We think that the case made by the pleadings and proofs is not one where an adequate and proper remedy by legal action can be obtained, but the action must be treated as an equitable one; and that the circuit court erred in dealing with it on any other basis. As a recovery in a legal action, the judgment must stand or fall on the liability of the de — 475 — fendants as president and treasurer, for no recovery can be bad at law against a minority of the board of directors for misconduct or negligence, inasmuch as they can act only when lawfully assembled, and their duties as such are. devolved on them as a board and not individually. Franklin Ins. Co. v. Jenkins, 3 Wend. 134; Gaffney v. Colvill, 6 Hill, 572, 573. 3. Much argument was had upon the rule of liability of corporate officers in cases such as this, presenting for consideration some questions in respect to which a considerable difference of opinion has prevailed. The liability of officers to the corporation for damages caused by negligent or unauthorized acts rests upon the common-law rule which renders every agent liable who violates his authority or .neglects his duty to the damage of his principal. It seems ‘to be now universally agreed that, no matter whether the act is prohibited by the charter or by-laws, the liability is on the ground of violation of authority or neglect of duty. Thomp. Liab. Off. Corp. 357; Briggs v. Spaulding, 141 U. S. 146. There can be no doubt that if the directors or officers of a company do acts clearly beyond their power, whereby loss ensues to the company, or dispose of its property or pay away its money without authority, they will be required to make good the loss out of their private estates. Thomp. Liab. Off. Corp. 375; Joint Stock Discount Co. v. Brown, L. R. 8 Eq. 381; Flitcroft’s Case, L. R. 21 Ch. Div. 519; Franklin Ins. Co. v. Jenkins, 3 Wend. 130; and many other authorities to this effect were cited by the respondent’s counsel. This is the rule where the disposition made of money or property of the corporation is onfe either not within the lawful power of the corporation, or, if within the power of the corporation, is not within the power or authority of the particular officer or officers. Where the ground of liability is for nonfeasance, negligence, or mis — 476 — judgment in respect to matters within the scope of the proper powers of the officer, he will be held responsible only for a failure to bring to the discharge of his duties such degree of attention, care, skill, and judgment as are ordinarily used and practiced in the discharge of such duties or employments; the degree of care, skill, and judgment depending upon the subject to which it is to be applied, the particular circumstances of the case, and the usages of business. In respect to directors or those acting ex officio as such, the rule of liability has been the subject of much discussion in the recent case of Briggs v. Spaulding, 141 U. S. 132, in which, although there was a strong dissent, the rule may be regarded as settled, in the federal courts at. least and in the courts of several of the states, as there laid down, and to the effect that directors, although often called “ trustees,” are not such in any technical sense, but that they are man-dataries, the relation between them and the corporation being rather that of principal and agent, but under circumstances they may be treated as occupying, in consequence, of the powers conferred on them, the position of trustees to eestuis que to'ustent; that the degree of care required of them depends upon the subject to which it is to be applied, and each case is to be determined upon its own circumstances; that, as they render their services gratuitously, they are not to be held to the degree of'responsibility of bailees for hire, or expected to devote their whole time and attention to their duties; that they are not, in the absence of any element of positive misfeasance, and solely on the ground of passive negligence, to be held liable, unless their negligence is gross or they are fairly subject to the imputation of a want of good faith. It is to be remembered that they have the same interests to protect and sub-serve as other stockholders, and self-interest naturally prompts them to look after their own, and the degree of — 477 — care they are bound to exercise is that which ordinarily prudent and diligent men would exercise under similar circumstances in respect to a like gratuitous employment, regard being had to' the usages of business and the circumstances of each particular case; that they are not liable, in the absence of fraud or intentional breach of trust, for negligence, mistakes of judgment, and bad management in making investments on doubtful or insufficient security. Where they have not profited personally by their bad management, or appropriated any of the property of the corporation to their own use, courts of equity treat them with indulgence. Were a more rigid rule to be applied, it would be difficult to get men of character and pecuniary responsibility to fill such positions. Thomp. Liab. Off. Corp. 357; Beach, Corp. § ’249. These views are sustained in Briggs v. Spaulding, 141 U. S. 130; Spering's Appeal, 71 Pa. St. 11; Citizens' B., L. & S. Asso. v. Coriell, 34 N. J. Eq. 383, 392; Swentzel v. Penn Bank (Pa. Sup.), 23 Atl. Rep. 413; In re Forest of Dean Coal Min. Co. L. R. 10 Ch. Div. 450; Ackerman v. Halsey, 37 N. J. Eq. 363; Hun v. Cary, 82 N. Y. 65; In re Denham & Co. L. R. 25 Ch. Div. 752; Watt's Appeal, 78 Pa. St. 391. These views are applicable, we think, to the case of all officers serving and acting within the scope of their authority gratuitously or practically so. The rule of liability in case of service for reward is well understood, and need not be repeated. It has been thought best to indicate the rules we think applicable to the liability of directors and other officers of corporations, as these questions were fully discussed at the argument, and in view of the probable importance of these questions in the future disposition of this cause. The finding of the circuit court that no directors’ meetings were held within the period mentioned, and that the business of the corporation, consisting of issuing stock, making loans, accepting prepayment of loans, and in fact all — 478 — the business of the corporation, was transacted without any direction of the board of directors by the defendants and Harvey, the secretary, since deceased, is, we think, sustained by the evidence, although stoutly denied by the defendants. There is not only no record of any such meetings, but those who are said to have been directors during the period all deny attending any such meetings or transacting any such business, and the defendants themselves are wholly unable to name a single director who was present at any such meeting. While the absence of a record of proceedings, due to the negligence of the secretary, would not defeat the action of the directors, we are satisfied no such meetings were held; and that the alleged want of authority in respect to many matters transacted by the defendants, or one of them, and Harvey was not supplied at any of the stockholders’ meetings, and unless ratified subsequently they were without requisite authority. During a period of about five years the regularly chosen directors of the corporation wholly abdicated their functions as such, and gave no attention whatever to their duties, and left everything connected with the affairs of the corporation to the management of the president, secretary and treasurer, by virtue of their several offices, and, beyond this, to take their own unheeded course. At the annual meetings of stockholders, officers and directors were regularly elected, and reports were made by the secretary and treasurer, but the directors elected utterly neglected their duties as before. The death of Harvey caused investigation, when the entire absence of proper entries on the ledger and record during all this period was discovered, as well as the fact that there was a shortage in the funds of the corporation. The defendants during all this time had proceeded to discharge the duties of their respective offices, and looked after and conducted the affairs of the corporation in connection with Harvey, the secretary, in entire good faith, — 479 — not deriving any improper personal gain or profit, and without improperly appropriating to themselves any of its property or funds. They may have made mistakes and misjudged as to their powers and duties. They were not guilty of intentional wrong. The defendant Denniston, the treasurer, whose functions were purely ministerial and extended only to receiving the moneys of the plaintiff and paying them out, and to the safe-keeping of its securities and keeping a correct account, has' accounted for and paid over every cent he received, and yet he was charged by the circuit court with losses of the corporation by the judgment in this case to the amount of over $21,000. We are unable to see how the defendants are-to be thus charged as ex offieio members of the board. They were not technically directors, and neither of them had it in his power to call a meeting of the board. -They could act as ex offieio members only at a meeting regularly convened, and no meetings were held. Directors cannot act in any other manner. Cook, Stock, § 592, and cases in note. This is so well settled that citation of authority would be superfluous. Stated monthly, meetings of the board were required to be held on- the next Tuesday after the monthly stockholders’ meetings, but the directors came not. Special meetings might be called on the written request of two directors, but no such request appears to have been made, and none are willing to own, now that misfortune has overtaken the company, that he ever acted as a director during the period in question. All have been eager to take the benefits, whatever they were, of the management of the defendants, and accept their share of the money disbursed in paying off the first series of stock at a figure amounting to nearly $8,000 more than was due on it, as it is now claimed. None but the president, treasurer, and secretary appear to have been willing to give the affairs óf the corporation any particular attention. And at least five of the — 480 — directors are understood to have received, and still hold, their shares of this amount, and now all appear to be demanding that these defendants shall put back that amount of money from their own funds into the treasury of the plaintiff to make good the alleged loss on this and other accounts, arising out of their attempt to manage the affairs of the plaintiff without the aid or authority of the board of directors. Such a claim, when well founded in law, ought to be established by entirely satisfactory evidence. Regarding the case now presented by the record as one where a recoveiy must depend upon the liability of the defendants disconnected with their <3® officio membership of the board, it is plain that Childs and Denniston, in their respective capacities as president and treasurer, are not responsible for the nonfeasance, negligence, or misfeasance of Ilarvey as secretary; nor is either of these liable for the nonfeasance, negligence, or misfeasance of the other in his official relations to the plaintiff. Their liability is several and separate. They cannot be held jointly liable for any act in excess of the authority of either or both of them, without proof of joint participation, to be proved in each instance and not presumed; and here we have neither finding nor proof of improper combination or intentional wrong. If Childs and Harvey, as president and secretary, exceeded their powers in any given instance to the loss or damage of the plaintiff, Denniston is not chargeable with it, without proof that he intermeddled with it and in excess of his authority. If Denniston and Harvey, as treasurer and secretary, exceeded their powers in any case to the loss or damage of the plaintiff, Childs is not liable without proof that he intermeddled or participated in the wrong. While these rules are obviously correct, and so clearly so that citation of authority is not needed to vindicate them, in view of the finding and the evidence upon Avhich it was based we have felt it proper to state them at length and — 481 — with some particularity, as bearing upon the correctness of tbe judgment of the circuit court. 4. It is contended by the respondent that as no motion for a new trial was made before judgment the question whether the finding is contrary to evidence is not open to review. As the trial was by the court without a jury, no such motion was necessary. Where there are exceptions to the finding, this court must review the case on the facts. Garbutt v. Bank of Prairie du Chien, 22 Wis. 377. 5. The extent of loss or damages the plaintiff had sustained formed a very important part of the controversy, and upon this branch of the case we regret to say that we are without the assistance and benefit of an examination and determination of the circuit court. As early as September, 1887, the plaintiff employed a Mr. Somers, of St. Paul, as an expert accountant, who had had considerable experience in the management of the affairs of building associations, to examine the books and papers of the plaintiff, ascertain its financial condition, the extent of its losses, and how they had been occasioned. His examination extended from Eebruary, 1882, to September, 1887. lie made a report upon these matters, which was put in evidence on the trial, or the substance of it, and this report, with a set of books compiled by him, and his testimony, constitute almost the entire basis on which the finding against the defendants for $21,407.05' rests. This report was adopted as an entirety by the circuit court, and the question of the extent of loss or damages, as well as legal questions in respect to liability, were, in effect, determined by the hired expert of the plaintiff instead of the court; and we have been urged to accept it here in like manner as final and conclusive. If we were willing to do so, and should accordingly affirm this judgment, it would transpire that the plaintiff’s expert had practically decided this important cause in both courts on several vital and important ques — 482 — tions of law as well as fact. We cannot suppose that the circuit court, if it had examined the report, would have rendered the judgment found in the record. It was not the duty of the defendant Denniston,, as treasurer, to collect the first five items in the foregoing statement, amounting to nearly $8,000; nor was it the duty of Childs, as president, so far as we are able to understand it. The treasurer is only “to receive all moneys as soon as paid into the association.” The secretary has custody of the accounts, books, and papers of the corporation, except deeds, bonds, mortgages, etc., kept by the treasurer, and is, it would seem, the executive manager of the financial business of the corporation. The testimony to show that any loss had been actually sustained while these defendants were in office is too vague and uncartain to justify the rendition of a judgment for these amounts. Mere proof of failure to collect these items is far from showing that they were lost. Besides, as to many of them, their collection might have been enforced by forfeiture and sale of the stock. These defendants did riot possess that power. It was lodged with the board of directors, and in some instances at least the security for loans is security for fines, dues, and interest. The collection of these items was a part of the business of the corporation in charge of its board of directors, and they might devolve it on the secretary if it was not one of the duties of his office, as wTe understand it was. It is quite as consistent with the evidence that these losses, if such there were, occurred after the defendants resigned as before. There is nothing in the by-laws nor in the evidence to show that it was the duty of the treasurer to do anything in relation to issuing stock beyond caring for the money paid for it after it was “ paid into the association.” His duties were purely ministerial, and he had nothing to do, as treasurer, with determining or computing the amount — 483 — to be paid on the issue of stock, nor is there any testimony showing or tending to show that he ever assumed to inter* •fere with any such matter. It was error, therefore, to include in a judgment against him the sum of $112.06 for losses oñ shares issued for too little money. Nor is there, so far as we can discover, any proof tending to show that this loss was the fault of the president, whose duty it is to sign stock certificates. There is embraced in the judgment items to the amount of about $6,800 for losses by cancellation. of loans, on the ground that there was not money enough paid on them to satisfy them. These items appear from Mr. Somers’ testimony to have been arrived at by ascertaining the amount of securities canceled each year during the period in question, and bjr deducting therefrom the amount that “ appears to have been paid on that account as per secretary's report” and the difference is charged up as a loss for which the defendants are held liable. The secretary’s report is not competent evidence against these defendants to charge them with this supposed loss. It is not evidence that no more was paid to him than he reported. Which of these defendants, if either, attended to the matter of settling up the loans upon which the alleged losses occurred, we are unable to ascertain from the evidence; and if in some cases Den-niston did, and in others Ghilds, we have no data upon which to ascertain the amount for which either ought to be charged. An exhibit annexed to the bill of exceptions would seem to show that in some instances releases of mortgage loans were executed and acknowledged by Childs as president, and in some cases by Denniston as treasurer, but in all cases by Harvey as secretary. If loss occurred as charged, the evidence is not sufficient to show it, much less to show what sum should be charged to Childs, and what to Demiiston. It seems to have been assumed throughout that if either Childs, Harvey, or Denniston exceeded his — 484 — authority as an officer, and loss ensued, the other two would necessarily be liable for it by reason of the assumption by the one of authority lodged only in the board of directors. Each of these parties, in the absence of participation of one or both the others, would alone be liable for. exceeding his authority. The testimony as to items amounting to $3,500 or thereabouts for losses by- reason of money having been paid for cancellation of stock in excess of its value seems to rest upon some method of ascertaining its supposed value adopted by Somers, which we do not fully understand; and the same is true as to cancellation of loans. He seems to have adopted some rule differing from the by-law of the company on that subject. He testified that the different parts of the rule, which is quite obscure, “don’t hang together.” But in view of the result at which we have arrived, it is not necessary to carefully examine this matter. 6. Stock was issued by the corporation in five series: First series, March 28, 1877, 500 shares; second series, March, 1879, 172 shares; third series, March, 1880, 76 shares; fourth series, March, 1883, 116 shares; and fifth series, February, 1886, 125 shares. It was generally supposed that the first series had matured so as to be payable at twice its nominal value in September, 1885; and the officers Childs, Denniston, and Harvey proceeded to make quite a large loan of the First National Bank of Hudson to raise money to pay off that series accordingly, and pledged to the bank a large amount of the plaintiff’s securities ; the defendant Denniston indorsing the note given for the loan. There was a general understanding that the first series was to be paid off, and the stockholders were anxious and ready to receive their money. Payments were accordingly made by the treasurer on orders drawn by Harvey as secretary, and signed by Childs, from time to time, until Harvey’s death in March, 1887, no one making — 485 — any objection or supposing, so far as the evidence shows, that there was any apprehension of any shortage in the funds of the corporation, or any irregularity in the management of its affairs. The defendants up to this time supposed Harvey had kept the books and records properly. Investigation ensued, and suit was brought against the bank by the plaintiff to recover its securities pledged for the loan. In the mean time a board of directors and other officers had been chosen, and the corporation had been rehabilitated and restored to its normal action, and payments had been ordered to be made, and were in fact paid, on this loan. The plaintiff was unsuccessful in its suit against the bank, and it finally paid the loan. The new board had voted to pay six per cent, interest in May, 1887, on all unpaid claims under the first series of stock, and directed the issue of orders to pay some of the claimants under this series, on the basis that it had matured in September, 1885, and as late as January 11, 1888, two orders were directed to be issued for the payment of some shares on the same basis. The question had been mooted in the previous summer and fall whether the first series had matured, and whether the shortage in the funds was not caused by paying off that series at much more than its actual value. The result was that as early, probably, as September, 1887, and soon as Somers had made his report, the plaintiff set up the claim that at the time the first series of stock was paid off it was in fact worth only $1.49, instead of $2, as had been supposed, basing the claim on such report. The item included in the judgment on this account is a large one, and is sustained only by the report or opinion of Mr. Somers, and the argument made upon the data furnished by his report and the evidence tends strongly to show that the stock was worth much more than the estimate made by him. The accuracy and justice of his report as a basis of judicial action against these defendants have been found so seriously at fault, and as it was not made the subject of judicial — 486 — examination and consideration in the circuit court, as it ought to have been, we cannot accept and act on his conclusions in respect to the claim that the first series of stock was worth only $1.49 when paid off. It is not within our province or duty to enter upon this inquiry until it has been examined and passed on by the circuit court. - •1 We think that inasmuch as the action was treated as a legal, and not an equitable, one, by the circuit court, and as the correctness of the report or statement of the expert, Somers, was not judicially investigated and passed on, there was practically a mistrial of the action, and that the judgment should be reversed on that ground, if for no other reason. “ A trial is the judicial examination of the issues between the parties.” R. S. sec. 2842. We have bestowed an unusual amount of care and labor upon this important case, and have been desirous, if possible, to arrive at some conclusion upon which we might direct such judgment to be entered as we might feel confident would do substantial justice to the parties, and avoid the delay and cost of further litigation, but we have been unable to do so with the material before us. The functions of this court, with few exceptions, are appellate only. We cannot permit the burden of the duty of trial courts to examine and pass upon cases before them to be cast upon us in the first instance, without proper opportunity for such examination, burdened as we are with a constantly increasing number of appeals. We cannot stop, if we were disposed to do so, to enter into elaborate computations and comparisons, and examine critically voluminous bills bf exceptions, with numerous manuscript exhibits, sometimes supplemented with a box filled with books and papers. All this great bulk of matter should bo reduced to reasonable compass, and arranged in proper order, before being brought to’ this court. As the judgment of the circuit court must be reversed for the errors already noticed, we think it is but justice to — 487 — both parties to order a new trial, and to direct that the cause be referred upon all the issues therein,, upon the proofs already taken and such as may be produced hereafter, to some attorney being a competent accountant, to report special findings upon all the issues, and to take and state an account of the transactions in question,' and report the same to the court, to the end that such judgment may be rendered thereon as shall be just and proper. The action must be regarded as an equitable one, and other necessary or proper parties may be brought in, if it is deemed necessary by the plaintiff or by the court, in order to secure a just and proper determination of the entire controversy. If it shall be thought proper to amend the pleadings so as to charge these defendants in equity as ex offieio members of the board of directors, it may be that all the directors during the period in question will be necessary parties (Sherman v. Parish, 53 N. Y. 483), on the ground that the defendants, if chargeable as such, are entitled to have contribution of.and from such directors (Nickerson v. Wheeler, 118 Mass. 295; Baynard v. Woolley, 20 Beav. 584; Ashhurst v. Mason, L. R. 20 Eq. 225, 236). There are authorities which take a contrary view, and as these questions thus suggested were not argued at the hearing we do not express any opinion in respect to them. The question whether the corporation plaintiff has not so far taken and enjoyed the benefits of the transactions complained of, and ratified them, that it has lost the right to complain of them.. was ably and vigorously pressed upon our attention, but we express no opinion on this point, as additional evidence may be produced materially affecting the rights of the parties in respect to it. By the Court.— The judgment of the circuit court is reversed, and the cause is remanded for a new trial and for further proceedings in accordance with the opinion of this court.