6

§ 2433. Payment of overdrafts. Permitting an overdraft is equivalent to the making of a loan. It has been held that it is a violation of duty on the part of the cashier to pay overdrafts; but the better rule seems to be that it is not negligence per se, in the absence of a by-law or order of a superior officer, for a cashier to pay the overdraft of a responsible customer.5 If an officer permitting an overdraft has no authority to permit an account to be overdrawn, he is liable to the bank for loss resulting from an overdraft. Whether overdrafts, under all circumstances, constitute a fraud, is doubtful, but it has been held that if a bank officer, without authority, permits an account to be overdrawn, the payment in excess of the deposits is "a fraud in law on the part of the officer paying or authorizing payment."7 Officers of a bank who permit large overdrafts by a corporation known to be financially embarrassed are liable to the bank for the amounts so lost, at least where they concealed the overdrafts. The propriety of allowing particular overdrafts, it has been held, "is one that addresses itself to the business judgment and discretion of the officers having that matter in charge. If they act prudently and honestly, they will not be held responsible for losses that occur from it. On the other hand, if they allow the funds of the bank to be so appropriated by a customer or customers who are known to be insolvent, or whose assets or business would not justify a prudent person similarly situated to extend them such credit, they will be liable to the bank as for a neglect of their duty, where loss results from it."9 It seems that one who is both a director and vice president of a

3 Oakland Bank of Savings v. Wilcox, 60 Cal. 126, 140.

The president of a bank was held liable for a loss resulting from permitting his insolvent son to overdraw his account without submitting the matter to the directors or advisory committee, contrary to the rules of the bank with respect to such matters. Western Bank v. Coldewey's Ex'x, 26 Ky. L. Rep. 1247, 83 S. W. 629.

4 Bank of St. Mary's v. Calder, 3 Strob. (S. C.) 403.

5 Wallace v. Lincoln Sav. Bank, 89 Tenn. 630, 24 Am. St. Rep. 625, 15 S. W. 448.

Payment of overdraft of responsible customer, by cashier, with the

knowledge and assent of the president -the two being the only officials authorized to make loans-does not make the cashier liable for a loss therefrom, at least where it is not shown that the customer is insolvent. Cope v. Westbay, 188 Mo. 638, 87 S. W. 504.

6 Oakland Bank of Savings v. Wilcox, 60 Cal. 126, 140.

7 Oakland Bank of Savings v. Wilcox, 60 Cal. 126, 140.

8 Citizens' Nat. Bank v. Blizzard, W. Va., 93 S. E. 338.

9 Western Bank of Louisville, Kentucky v. Coldewey's Ex'x, 120 Ky. 776, 786, 83 S. W. 629. See also First Nat. Bank v. Reese, 25 Ky. L. Rep. 778, 76 S. W. 384.

bank is chargeable with knowledge that the account of one with whom he deals is overdrawn at said bank.10

C. Acts Ultra Vires or Illegal or Beyond Authority of Particular

Officer

§ 2434. General rules. Whether a director or other corporate officer be considered as an agent or as a trustee, he is liable to the corporation or its stockholders as representing the corporation, where he acts outside the scope of his authority to the injury of the corporation. If considered as a trustee, there is applicable the general rule governing trustees to that effect.12 If considered as an agent, then the general rule applicable to all agents is that "it is the duty of the agent, in all of his acts and contracts, to keep within the limits of his authority, and he must, in general, indemnify his principal against the consequences of not doing so." 13 It must be noted, however, that where

10 German Sav. Bank v. Wulfekuhler, 19 Kan. 60.

11 United States. Cooper v. Hill, 94 Fed. 582, 587; Cockrill v. Cooper, 86 Fed. 7, 12.

Massachusetts. Greenfield Sav. Bank v. Abercrombie, 211 Mass. 252, 39 L. R. A. (N. S.) 173, Ann. Cas. 1913 B 420, 97 N. E. 897.

Montana. McConnell v. Combination Mining & Milling Co., 30 Mont. 239, 104 Am. St. Rep. 703, 76 Pac. 194, aff'd 31 Mont. 263, 79 Pac. 248.

New Jersey. Williams v. McDonald, 42 N. J. Eq. 392, 7 Atl. 866, rev'g on other grounds 37 N. J. Eq. 409.

New York. Austin v. Daniels, 4 Den. 299.

Oklahoma. City Nat. Bank of Mangum v. Crow, 27 Okla. 107, Ann. Cas. 1912 B 647, 111 Pac. 210.

England. London Trust Co., Ltd. V. Mackenzie, 68 L. T. Rep. 380.

A general manager is liable to the corporation for damages resulting from his ultra vires acts. Fergus Falls Woolen Mills Co. v. Boyum, 136 Minn. 411, 162 N. W. 516.

There need not be any proof of loss. Murray v. Smith, 166 N. Y. App. Div. 528, 152 N. Y. Supp. 102.

Liability of director for ultra vires acts of co-director, see §§ 2493-2500, infra.

Statutes imposing liability are often merely declaratory of the common law, as illustrated by the National Bank Act imposing liability for excessive loans. Cockrill v. Cooper, 86 Fed. 7, 12.

12 If a trustee "exceeds his authority, or disobeys the rules prescribed to him, he acts at his peril, and undertakes responsibility for the consequences.' Pennington v. Seal, 49 Miss. 518, 524.

"Good faith is a defense only where a trustee, acting within the limits of his powers with proper prudence and diligence, commits mere mistakes or errors of judgment, but is not a defense where a trustee disregards the limits placed upon his power by law or by the trust instrument." Gibney v. Allen, 156 Mich. 301, 311, 120 N. W. 811.

13 Rule as applied to agents in general, see 1 Mechem, Agency (2nd Ed.), § 1240.

Directors and officers of corporations, it is held, "are agents of the corporation for which they act, and

[§ 2435 the question arises between the corporation and the officer, the agent can rely only upon his actual authority, while if a third person seeks to hold the officer liable, the authority of the officer is measured by his apparent rather than his actual authority.14

Sometimes this acting beyond his authority by a director or other corporate officer is considered by the courts merely from the viewpoint of liability for negligence or liability for misappropriation or conversion of corporate assets, or some other specific form of liability, in which case the rule is stated hereafter in this chapter under the appropriate subdivision.

For the purposes of this subdivision, it is not necessary to distinguish between (1) acts which are strictly ultra vires because beyond the powers of the corporation, and (2) acts which are either expressly forbidden by statute or charter or by-law, on the part of the corporation itself, and (3) acts which a statute or the charter or a by-law provides shall be done in a particular way, and (4) acts which although not beyond the powers of the corporation are outside the scope of the powers of the particular officer exercising them. In all the cases enumerated, the acts of the officer are unauthorized and the same general rules apply to each class of acts.

§ 2435. Illustrations of general rules. This rule has been applied to many different unauthorized acts. For instance, ordinarily a bank or other company may recover from officers the amount lost by a loan made by such officers in violation of a statute or the charter.15

IV Priv. Corp.-21

So

make directors personally liable for making such a loan.

But in Williams v. McDonald, 37 N. J. Eq. 409, it was held that a director was not liable for making a loan of a greater amount than the law allowed to be loaned on the security taken, where he clearly acted in good faith. In the absence of participation or negligence on their part, directors or other officers of a bank are not personally liable for losses resulting from a loan to an officer in violation of a statute prohibiting a director or other officer of a bank from borrowing from it, and making it a criminal offense to do so, for the statute affects only the officer borrowing. Wheeler v. Aiken County Loan & Savings Bank, 75 Fed. 781.

the rule has been applied to payments by the manager of an amusement company to silence complaints as to conducting its business on Sunday, since not only ultra vires but also bad in morals.16 And the rule that when directors intentionally act ultra vires of the corporation, they are liable for the losses it sustains in consequence, has been applied to the publication of a libel.17 So where directors of a bank owning a mine for sale, on being unable to sell it, expended large sums in prospecting for ore in the mine, such act was ultra vires, and rendered the directors personally liable to the corporation for the amount so expended.18 A fortiori, money may be recovered as a misappropriation by the secretary, where expended in improving a mining claim not belonging to the corporation.19 Likewise, directors of a bank are personally liable, where they engage in or knowingly permit speculation in stocks with the funds of the bank, for losses sustained.20 And where the officers of a New Jersey corporation caused a dentistry business to be conducted in Pennsylvania under the corporate name without charter right and in violation of the laws of the latter state, they became personally liable for negligent treatment of a patient by an employee, the patient believing herself to be receiving treatment from duly licensed dentists.21 Engaging in an ultrà vires business, in which the corporate assets are wasted or lost, makes the directors personally liable.22 So where one, as president of a corporation excavating on its own land, agreed with an adjoining owner to excavate in a particular way, but thereafter, without authority from the company, changed the method of doing the work, he'exceeds his authority and is personally liable for any injuries resulting from acts done in excess of his authority.23 So where the treasurer of a bank transferred a mortgage held by himself to the bank, and paid himself for it, he is liable for a loss sustained by the bank on such mortgage where the mortgaged property was not worth double the mortgage as required by the bank's charter, and where the investment was not submitted to the finance committee for approval as required by the bylaws.24 But it has been held that a director of a bank is not personally liable, on the theory that in discounting paper he induced

16 Roth v. Robertson, 64 N. Y. Misc. 343, 118 N. Y. Supp. 351.

17 Hill v. Murphy, 212 Mass. 1, 40 L. R. A. (N. S.) 1102, Ann. Cas. 1913 C 374, 98 N. E. 781.

18 Cooper v. Hill, 94 Fed. 582, 586. 19 Kleinschmidt v. American Min.

Co., 49 Mont. 7, 139 Pac. 785.

20 McKinnon v. Morse, 177 Fed. 576.

21 Mandeville v. Courtright, 142 Fed. 97, 6 L. R. A. (N. S.) 1003. 22 Dietrich v. Rothenberger, 25 Ky. L. Rep. 338, 75 S. W. 271.

23 Malone v. Pierce, 231 Pa. 534, 80 Atl. 979.

24 Williams v. Riley, 34 N. J. Eq.

398.

or permitted the bank to extend credit in excess of the legal limit fixed by statute, where, in the discount transaction, he acted as the representative of his father who held the paper, and not as director.25

§ 2436. Reasonable care as immaterial. If the liability of a corporate officer is based on the alleged fact that he has acted beyond his powers or beyond the powers of the corporation, or in violation of a statute or the charter or by-laws, the test of reasonable care which applies when he acts within his powers has nothing to do with the question of liability except in so far as such care bears on whether he should have known that the acts in question were ultra vires or expressly forbidden or beyond his powers. If he knowingly exceed his authority or the authority of the corporation, he is liable without regard to exercise of reasonable care. In a Missouri case, directors of a bank had loaned to one person more than one-fourth of the capital, in violation of a statute which, however, imposed no penalty for its violation. It was contended that no liability existed "for the reason that the acts prohibited are not such as would make them liable at common law, and no penalty is fixed for the violation of the statute, and the acts charged were not charged to have been done negligently, fraudulently, or corruptly." It was held sufficient that there was a violation of the statute, with loss to the bank, without regard to any negligence, on the theory that every violation of law is a breach of duty and that directors are liable to the company for all losses occasioned by any flagrant breach of their duty.26

§ 2437. Materiality of fact that act is forbidden by statute or charter. If acts are expressly prohibited by the charter or a statute, but liability for violation thereof is not imposed on corporate officers by the charter or statute, the doing of such an act does not make the officers personally liable merely because the act is a violation of the charter or a statute. So far as liability of directors to the corporation is concerned, it has been said that the liability "for damages caused by unauthorized acts rests upon the common law rule which renders every agent liable who violates his authority to the damage of his principal. A statutory prohibition is material under these circumstances merely as indicating an express restriction placed upon the powers delegated to the directors when the corporation was formed." 27 Moreover, an officer of a corporation is not liable to the corporation

25 Hicks v. Steel, 142 Mich. 292, 4 L. R. A. (N. S.) 279, 105 N. W. 767.

26 Thompson v. Greeley, 107 Mo. 577, 17 S. W. 962.

271 Morawetz, Corporations, § 556.