§ 2424. General illustrations of breach of duty. It is the duty of directors to "act in good faith and unselfishly toward the corporation,' 64 and they cannot exercise the corporate powers for their private or personal advantage or gain.65 This is elementary and the application of such rules has already been noticed at length in connection with the law as to dealings between corporations and their officers.66 It follows that any act of an officer not done in good faith is a breach of duty, and where loss results to the corporation therefrom, it may ordinarily hold the officer liable for the loss; but an officer may act honestly with a third person, although to the apparent injury of the corporation, without necessarily incurring personal liability.67 Thus, the directors have the right to pay corporate debts, although by so doing the corporation may be disabled from carrying on its business.68 So if a large stockholder appoints his agent as a director to look after his corporate interests, his duties as director, of course, are paramount to those as agent of the stockholder.69 If one takes over the management of a corporation under an option to purchase a controlling interest, he is not liable for a failure to make the business profitable, where there is no fraud or mismanagement.70 An officer is not liable for breach of duty as such. officer in a particular transaction where he acts therein not as agent for the corporation but as representing the other party to the transaction.71 Where the president of a corporation sold all its property, taking a bond and mortgage to secure the price, and thereafter he procured the passage of a resolution cancelling the mortgage so as to 64 Billings v. Shaw, 209 N. Y. 265, 103 N. E. 142, aff'g 151 N. Y. App. Div. 888, 135 N. Y. Supp. 1100. 65 Pollitz v. Wabash R. Co., 207 N. Y. 113, 100 N. E. 721, modifying 150 N. Y. App. Div. 715, 135 N. Y. Supp. 789. See also § 2303 et seq., supra. 66 See §§ 2330-2403, supra. 67 Where the officers of a corporation have induced a third person to contract with it by false representations as to its financial condition, etc., a director incurs no liability to the corporation by informing the third person of the falsity of the representations and thereby causing him to rescind. Hale v. Mason, 160 N. Y. 561, 55 N. E. 202, aff'g 22 N. Y. App. Div. 620, 48 N. Y. Supp. 1105. enable the purchaser to dispose of the property, and the purchaser afterwards became insolvent so that the seller never realized anything from the sale, the president was held personally liable to stockholders of his corporation.72 The unexpired portion of the contract of a general manager of a company is not assignable; and corporate officers who permit the manager to assign it for a large sum are guilty of a breach of trust." 73 Where a director of a corporation owning a secret process, and holding in individual trust for the company a copy of the formula of its process, afterwards became president of another company and sought to use such process, he may be enjoined because of his breach of trust.74 Watering the stock is not an actionable breach of trust on the part of directors where the stockholders are liable for the full unpaid price of the stock and the remedy against them has not yet been exhausted.75 § 2425. Favoring part of stockholders. It is the duty of a board of directors to manage the corporate affairs solely in the interest of the corporation, "quite regardless of the effect of its policies and management upon the fortunes of individual stockholders in the corporation." 76 Mismanagement by corporate officers by exercising their powers solely in behalf of the owners of one-half of the stock by whom they were elected is ground for an accounting.77 If different persons claim the right to a majority of the stock, the directors should not side with either faction.78 Corporate officers have no right to extend favors to certain stockholders as against other stockholders or the corporation.79 § 2426. Failure of directors to inform stockholders of material facts on transfer of property. Directors are not liable, where they lease property belonging to the corporation, pursuant to a vote of the stockholders, merely because of their failure to inform the stockholders of an offer to purchase the property, where it does not appear that 72 Brinckerhoff v. Roosevelt, 131 Fed. 955, aff'd 143 Fed. 478. 73 Moulton v. Field, 179 Fed. 673, aff'g 166 Fed. 607. 74 Vulcan Detinning Co. v. American Can Co., 72 N. J. Eq. 387, 12 L. R. A. (N. S.) 102, 67 Atl. 339. 75 Wait v. McKee, 95 Ark. 124, 128 S. W. 1028. 76 Henry L. Doherty & Co. v. Rice, 186 Fed. 204, 218. 77 Green v. National Advertising & Amusement Co., Minn. 162 N. W. 1056. 78 Henry L. Doherty & Co. v. Rice, 186 Fed. 204, 218. 79 Davies v. Monroe Waterworks & Light Co.. 107 La. 145, 31 So. 694; Schmid v. Lancaster Ave. Theater Co., 214 Pa. 373, 91 Atl. 363. the stockholders would have been affected by such knowledge or that the offer was a responsible one.80 § 2427. Breach of duty in failure to warn company of contemplated misappropriation of funds of subsidiary company. In a decision in New York, a director of a corporation which owned practically all the stock of a subsidiary company knew that the manager of the latter was about to misappropriate moneys of the subsidiary company. No one else knew of it, and he neglected to inform his company about it. By reason of the misappropriation, the value of the shares of the subsidiary company decreased. The parent company sued its director to recover its loss, and it was held that he was liable; that the suit was in effect a suit by a stockholder against its own agent; and that it was no defense that defendant might be also answerable for the same wrong to the subsidiary company and thus exposed to the risk of a double liability.81 § 2428. Preference of creditors. It has been held that the preference of a corporate creditor by an insolvent corporation, where there is no fraud in the contracting of the debt or in the transfer of the company's assets in payment of it, does not create a liability on the part of the directors to answer to it as for a breach of trust.82 § 2429. Injury to good-will. A corporation may recover damages from its general manager for injuries to its business of manufacturing flour, where he wilfully manufactured inferior flour and sold it as and for one of the higher and finer grades of flour produced by the company, on the theory of an injury to the good-will of the company.83 § 2430. Enticing servants away. A corporation may recover damages from directors for enticing away its servants, on their selling out their interests in the company, although the enticement was not actually consummated until after they had sold their stock and ceased to be directors, where the plans in regard thereto were partially carried out while they were directors.84 80 Strunk v. Owen, 199 Pa. 73, 48 Atl. 888. 81 General Rubber Co. v. Benedict, 215 N. Y. 18, L. R. A. 1915 F 617, with note, 109 N. E. 96, aff'g 164 N. Y. App. Div. 332, 149 N. Y. Supp. 880. See also dissenting opinion of Justice Collins. 82 Kinter v. Connolly, 233 Pa. 5, 81 Atl. 905. 83 Sessinghaus Milling Co. v. Hanebrink, 247 Mo. 212, Ann. Cas. 1914 B 875, 152 S. W. 354. 84 Hooker, Corser & Mitchell Co. v. Hooker, 88 Vt. 335, 92 Atl. 443. § 2431. Failure to devote all of time to corporate business. Whether an officer must devote all of his time to corporate business depends upon the particular office he holds, the governing by-laws, etc.85 If he is required to devote all his time to the business, then what constitutes a violation of such duty is governed by the law in regard thereto applicable to employees in general. § 2432. Liability for bad loans or investments-In general. In regard to agents of individuals or others, in general, the law is that an agent who has undertaken to make loans or investments is not a guarantor of them unless he has expressly agreed to be, but his duty is merely to exercise ordinary and reasonable care.86 However, directors and other corporate officers are liable where they have either wilfully or negligently made bad loans or investments, resulting in loss to the corporation, provided the loan or investment was not a mere mistake in judgment.87 In making loans, the managing officers must, it is clearly evident, "exercise diligence in investigating as to the value of the securities and safety of the loan, and ordinary care and prudence in acting on the facts known to them." 88 Furthermore, as stated by the late Justice Deemer of the Supreme Court of Iowa, it is the duty of a member of the investment committee to "advise his associates of any and every thing known to him affecting the financial condition and situation of proposed borrowers [from the bank], and this without being asked. He impliedly contracted to give this information." 89 Of course if directors of a bank make loans to persons known to be insolvent, the directors are liable to the bank for the loss; 90 and the same rule applies where the loan is made The court held not objectionable as a mere legal inference allegations in suit against directors for negligent loaning of corporate funds that the act was such as no prudent man would sanction or approve and that in giving their sanction the defendant directors were negligent. Fisher v. Parr, 92 Md. 245, 48 Atl. 621. 88 New Haven Trust Co. v. Doherty, 75 Conn. 555, 96 Am. St. Rep. 239, 54 Atl. 209, applying rule to officers of insurance company. 89 Toledo Sav. Bank v. Johnston, 94 Iowa 212, 221, 62 N. W. 748. 90 Stone v. Rottman, 183 Mo. 552, 82 S. W. 76. by the cashier at the request of the president, so as to make the latter liable.91 Thus, directors are liable to the corporation where they permit a co-director, known by them to be insolvent, to borrow a large sum from the company for his own personal use, on giving a worthless note due in three years without interest.92 So if the cashier of a bank loans money without security and without entering the loan in the books of the bank, and makes false reports as to the cash on hand in order to conceal the loan from the board of directors, he is liable to the bank for the loss resulting from the loan.93 And the president of a bank who induces the cashier to loan money to a minor, by a promise of collateral liability, but which promise is invalid because oral, is liable to the bank for the loss from the loan.94 In discounting paper, it seems that the cashier of a bank is not personally liable to the bank where he acted, in the particular instance, under the directions of the president of the bank.95 Officers are not liable where they loan a third of the capital stock to a director who was the chief merchant of the town with a good business and financial standing.96 Statutes in some states impose liability upon bank directors where they loan more than a certain per cent. of their capital to one person or to a stockholder or officer.97 However, a bad loan may be ratified by failure of the corporation to object in any way to it for several years during which they had knowledge thereof.98 Whether directors are liable for bad loans or investments made by other executive officers 99 depends upon matters hereinafter considered.1 The question of personal liability for loans forbidden by statute or the charter is considered hereafter.2 91 First Nat. Bank of Sturgis v. Reed, 36 Mich. 263. 92 Cream City Mirror Plate Co. v. Coggeshall, 142 Wis. 651, 135 Am. St. Rep. 1091, 126 N. W. 44. 93 San Joaquin Valley Bank V. Bours, 65 Cal. 247, 3 Pac. 864. 94 Brown v. Farmers' & Merchants' Nat. Bank, 88 Tex. 265, 33 L. R. A. 359, 31 S. W. 285, aff'g (Tex. Civ. App.), 31 S. W. 216. 95 Pryse v. Farmers' Bank, 17 Ky. L. Rep. 1056, 33 S. W. 532. 96 Wheeler v. Aiken County Loan & Savings Bank, 75 Fed. 781. 97 Wickliffe v. Turner, 154 Ky. 571, 157 S. W. 1125, where liability imposed in favor not only of creditors but also in favor of stockholders. 98 First Nat. Bank v. Goddis, 31 Wash. 596, 72 Pac. 460. 99 See Bailey v. O'Neal, 92 Ark. 327, 135 Am. St. Rep. 185, 122 S. W. 503; Stone v. Rottman, 183 Mo. 573, 82 S. W. 76; Kavanaugh v. Commonwealth Trust Co. of New York, 64 N. Y. Misc. 303, 118 N. Y. Supp. 758; Warren v. Robison, 25 Utah 205, 70 Pac. 989. 1 See $$ 2472-2503, infra. |