74

directors of the other class could remain in ignorance only by a failure to discharge with ordinary fidelity and care the duties of their office." The amount of compensation may be material. For instance, a president of a corporation who receives a mere nominal sum as such should be held to a less strict accountability, under ordinary circumstances, than in the case of a president who receives a large sum such as to apparently demand all or the greater portion of his time.75 In Kentucky, the following language has recently been approved: "That a higher degree of vigilance is to be required of the president of a bank, whose salary for a general supervision of its affairs is sufficient to compensate him in devoting his entire time and attention to its business, may be conceded; but directors who receive no compensation, or a president who is a mere figure-head of the institution, are liable for only gross neglect (in the absence of fraud) in the management of the corporation, and this rule most certainly applies when stockholders are attempting to make them liable." 78 So in Kentucky it was expressly held that while directors cannot be held for failure to detect fraudulent entries made by the cashier in the books of the bank, although extending over a period of nine years, where they received no compensation for their services, yet if a director receives a salary such as paid a president or general manager, he would be liable in such a case.77 This want of compensation is the ground upon which the Supreme Court of Pennsylvania bases its ruling that directors are liable only for gross negligence to be measured by the care exercised by other directors of like corporations; 78 and the same is true as to some decisions in Wisconsin 79 and the federal courts.80

74 Note in 17 Am. St. Rep. 95, 99. 75 Nor should the president, with a nominal salary, be held to a stricter account than the use of ordinary care, as the small amount was no doubt paid him in this case, more for the reason that he was oftener at the bank than the other members of the board, than as compensation for services as president." Dunn's Adm'r v. Kyle's Ex'r, 77 Ky. 134, 142.

76 Jones v. Johnson, 86 Ky. 530, 6 S. W. 582, approved in First State Bank of Nortonville v. Morton, 146 Ky. 287, 294, 142 S. W. 694.

77 Savings Bank of Louisville's Assignee v. Caperton, 87 Ky. 306, 314, 12 Am. St. Rep. 488, 8 S. W. 885.

78 Swentzel v. Penn Bank, 147 Pa. St. 140, 15 L. R. A. 305, 30 Am. St. Rep. 718, 23 Atl. 405, and see § 2447, infra.

79 North Hudson Mut. Building & Loan Ass'n v. Childs, 82 Wis. 460, 33 Am. St. Rep. 57, 52 N. W. 600, and see 2447, infra.

80 Briggs v. Spaulding, 141 U. S. 132, 35 L. Ed. 662, and see § 2447, infra.

§ 2445. Rules as to directors as applicable to other officers. Most of the decisions involving the question as to the required degree of care are expressly limited to directors, and there is very little law as to the degree of care required of other officers. Of course, a director of a corporation is not required to devote the same amount of attention to the business of a corporation as the general manager, or the president who is paid a salary, or the cashier of a bank, or a paid secretary or treasurer, who devote all or a greater part of their time to the business of the company. It follows that paid officers other than directors may be held liable in a case where directors would be held not liable.81

§ 2446. Negligence as slight, ordinary or gross-In general. The courts have in many instances attempted to define the degree of care required of directors and other corporate officers, to absolve them from liability for negligence. Some of the statements are mere glittering generalities. Others are more specific, embracing in some cases more or less conflict of opinion. All of them are of little value in the abstract, and when they are applied by a jury, as is usually the case, the courts will not interfere with the verdict of the jury except in a clear case. The theory of three degrees of negligence, described as slight, ordinary and gross, was introduced into the common law, it has been said, from some of the commentators on Roman law.82 However, much to the relief of all concerned, the courts have largely discarded this classification.

As to some propositions, the courts all agree. First, there is no question but that the officer is not bound to exercise the highest possible degree of care-a rule applicable to all agents.83 As early as 1829, in Louisiana, in the first case in this country where the negligence of bank directors was judicially reviewed by an appellate court, it was decided that the highest degree of care was not necessary but only ordinary care and attention.84

Second, he is not liable for a mere mistake, i. e., an error of judgment.8

85

On the other hand, it is settled beyond question that he is liable, in any event, for gross negligence,86 although just what the courts mean in the use of the term "gross negligence" is not always apparent.87

§ 2447. -Gross negligence as test. There is no question but that directors and other corporate officers are liable for gross negligence,88 and in some jurisdictions their liability to the corporation is confined to such degree of negligence, according to the broad statements in some of the decisions.89 However, different courts attach different meanings to the words "gross negligence," as used in this connection. Some of them intend to signify no more by these terms than want of that care and attention which men of common prudence ordinarily give to their affairs, while others understand the same words as implying that degree of inattention and want of care indicative either of wilful recklessness, or intent to defraud or permit others to defraud.90 Thus, in a recent case in Georgia, Justice Lumpkin said: "Some courts have declared that they are only liable for gross negligence or breach of duty resulting in injury. But in some, probably most, of the cases so declaring, it will be found that the failure of directors to use ordinary care in supervision has been treated as amounting to gross negligence." 91 In Alabama, however, it is said that, "with respect to particular acts within the range of their au

85 See 2452, infra.

86 Elliott v. Farmers' Bank of Philippi, 61 W. Va. 641, 57 S. E. 242.

Directors are, at least, liable in case of gross negligence in the performance of their duties as directors. Loan Society of Philadelphia v. Eavenson, 248 Pa. 407, 94 Atl. 121.

87 See § 2447, infra.

88 See § 2446, supra.

89 Alabama. King v. Livingston Mfg. Co., 192 Ala. 269, 68 So. 897.

California. Neall v. Hill, 16 Cal. 145, 76 Am. Dec. 508.

Kentucky. First State Bank of Nortonville v. Morton, 146 Ky. 287, 142 S. W. 694; Savings Bank of Louisville's Assignee v. Caperton, 87 Ky. 306, 12 Am. St. Rep. 488, 8 S. W. 885;

Jones v. Johnson, 86 Ky, 530, 6 S. W. 582; Dunn's Adm'r v. Kyle's Ex'r, 14 Bush 134.

Maryland. Carrington v. Thomas C. Basshor Co., 118 Md. 419, 84 Atl. 746, applying rule to care of trust funds; Foutz v. Miller, 112 Md. 458, 76 Atl. 1111; Booth v. Robinson, 55 Md. 419. England. Lagunas Nitrate Co. v. Lagunas Syndicate, [1889] 2 Ch. 392.

90 See note in 17 Am. St. Rep. 95, 98, and also Overend & Gurney Co. v. Gibb, L. R. 5 H. L. 480, 42 L. J. Ch. (N. S.) 67; In re Liverpool Household Stores Ass'n, 62 L. T. (N. S.) 873.

91 McEwen v. Kelly, 140 Ga. 720, 79 S. E. 777.

thority, and subject to their discretion, directors are not liable to the corporation so long as they act in good faith, and without gross negligence which would support an imputation of fraud;"' 92 and in Maryland it seems that there is no liability for loss sustained by mismanagement unless it was so gross as to constitute fraud.93 In Kentucky, it is held that "directors who receive no compensation, or a president who is a mere figure-head of the institution, are liable for only gross neglect (in the absence of fraud) in the management of the corporation." 94 In England, in a recent case, Justice Neville said. that "it has been laid down that so long as they [directors] act honestly they cannot be made responsible in damages unless guilty of gross negligence. There is admittedly a want of precision in this statement of a director's liability. In truth, one cannot say whether a man has been guilty of negligence, gross or otherwise, unless one can determine what is the extent of the duty which he is alleged to have neglected. A director's duty has been laid down as requiring him to act with such care as is reasonably to be expected from him, having regard to his knowledge and experience. He is, I think, not bound to bring any special qualifications to his office. He may undertake the management of a rubber company in complete ignorance of everything connected with rubber, without incurring responsibility for the mistakes which may result from such ignorance; while, if he is acquainted with the rubber business he must give the company the advantage of his knowledge when transacting the company's business. He is not, I think, bound to take any definite part in the conduct of the company's business, but so far as he does undertake it he must use reasonable care in its despatch. Such reasonable care must, I think, be measured by the care an ordinary man might be expected to take in the same circumstances on his own behalf." 95 "These directors," it was said in a New Jersey case, "serve without pay. They were selected by their fellow stockholders to manage gratuitously the affairs of the association in which they and the other stockholders were jointly interested.

IV Priv. Corp.-22

To apply to them the strict

Savings Co. v. Conrad, 101 Md. 224, 60 Atl. 737.

94 Jones v. Johnson, 86 Ky. 530, 6 S. W. 582, approved in First State Bank of Nortonville v. Morton, 146 Ky. 287, 142 S. W. 694.

95 In re Brazilian Rubber Plantations & Estates, Ltd., [1911] 1 Ch. 425, 436.

rules which are applicable to trustees who assume the discharge of the duties of private trusts, would be unjust. In the absence of fraud, and where they have neither derived, nor expected to derive, any profit, benefit or advantage from their management which was not common to the other stockholders; when they have acted fairly, and have not been guilty of gross neglect or gross inattention, they should not be held liable. The rule applicable to mandataries is sufficiently stringent for such cases, and is a reasonable one. They should be held liable only in case of fraud, gross negligence or mis

In addition, it is to be noticed that several of the states which adopt this gross negligence rule also hold that the care required is only that of ordinarily prudent men under similar circumstances, and seem to treat the two statements as meaning the same thing.97

If gross negligence be understood as meaning something nearly approaching fraud or bad faith, then the rule is not to be commended and is against the decided weight of authority. In criticising this rule of gross negligence, Mr. Morawetz calls attentions to the fact that such a rule is at the best misleading, and that "the plain and obvious rule is, that directors impliedly undertake to use as much diligence and care as the proper performance of the duties of their office requires. What constitutes a proper performance of the duties of a director is a question of fact, which must be determined in each case in view of all the circumstances; the character of the company, the condition of its business, the usual methods of managing such companies, and all other relevant facts must be taken into consideration. It is evident that no abstract reasoning can be of service in reaching a proper solution.'

§ 2448. Ordinary care as test. In most jurisdictions ordinary or reasonable care is the test.99 The directors, "when acting within the scope of their authority, are bound only to the exercise of good faith and the use of their best judgment in the conduct of the busiTheir duties do not make them insurers of the property of the company, nor guarantors that the enterprise undertaken

ness.

*

*

96 Citizens' Building, Loan & Savings Ass'n v. Coriell, 34 N. J. Eq. 383, 392. However, later cases in New Jersey do not follow this rule if it be construed as limiting liability to actually gross negligence.

Penn Bank, 147 Pa. St. 140, 15 L. R. A. 305, 30 Am. St. Rep. 718, 23 Atl. 405.

97 See, for instance, Swentzel V.

981 Morawetz, Corporations, § 552. 99 General Rubber Co. v. Benedict, 164 N. Y. App. Div. 332, 149 N. Y. Supp. 880, aff'd 215 N. Y. 18, L. R. A. 1915 F 617, 109 N. E. 96.