by the corporation shall be successful and profitable."1 "The law requires them to do no more than exercise ordinary diligence, intelligence, and judgment in the management of the corporate business. Directors "are bound to use fair and reasonable diligence in the management of the company's affairs, and to act honestly, but they are not bound to do more. 3 § 2449. What constitutes "ordinary" or "reasonable" care-In general. Assuming that ordinary or reasonable care is the standard of care required, what is meant by that term? By reference to general textbooks on the law of Negligence, it will be seen that “ordinary" or "reasonable" care means, it is generally held, such care as an ordinarily careful and prudent person would exercise in similar relations, and under the same circumstances, with reference to his own affairs. In regard to corporate directors, however, the decisions are in conflict. § 2450. -Care required as that which men of ordinary prudence exercise in regard to their own affairs. So far as agents in general are concerned-including agents of individuals or firms as well as agents of corporations-the rule has been stated that they must 'exercise reasonable diligence, and such care and skill as are ordinarily possessed by persons of common capacity engaged in the same business."' 4 In regard to trustees in general, a leading textbook writer on the law of Trusts makes the following statement: "It was observed in Harden v. Parsons [1 Eden 148] that no man can require, or with reason expect, that a trustee should manage another's property with the same care and discretion as his own. But this is neither sound morality nor good law. A trustee must use the same care for the safety of the trust fund, and for the interests of the cestui que trust, that he uses for his own property and interests. And even this will not be sufficient if he is careless in his own concerns; for a trustee must in all events use such care as a man of ordinary prudence uses in his own business of a similar nature.”5 1 McConnell v. Combination Mining & Milling Co., 31 Mont. 563, 79 Pac. 248. 2 Braswell v. Pamlico Insurance & Banking Co., 159 N. C. 628, 42 L. R. A. (N. S.) 101, 75 S. E. 813. 3 Northern Trust Co. v. Butchart, 35 Dom. L. R. (Can.) 169, 176, citing In re Forest of Dean Coal Min. Co., 10 Ch. Div. 450, 452. 41 Mechem, Agency (2nd Ed.), § 1279. 51 Perry, Trusts (6th Ed.), § 441. In a leading New York case, involving the liability of the trustees of a savings bank, it was said by Judge Earl: "The trustees are bound to observe the limits placed upon their powers in the charter, and if they transcend such limits and cause damage, they incur liability. If they act fraudulently or do a wilful wrong, it is not doubted that they may be held for all the damage they cause to the bank or its depositors. But if they act in good faith within the limits of powers conferred, using proper prudence and diligence, they are not responsible for mere mistakes or errors of judgment. That the trustees of such corporations are bound to use some diligence in the discharge of their duties cannot be disputed. All the authorities hold so. What degree of care and diligence are they bound to exercise? Not the highest degree, not such as a very vigilant or extremely careful person would exercise. If such were required, it would be difficult to find trustees who would incur the responsibility of such trust positions. It would not be proper to answer the question by saying the lowest degree. Few persons would be willing to deposit money in savings banks, or to take stock in corporations, with the understanding that the trustees or directors were bound only to exercise slight care, such as inattentive persons would give to their own business, in the management of the large and important interests committed to their hands. 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." "The law is settled in this state," said Chief Justice Parker in a later decision of the New York Court of Appeals, "that directors of monetary corporations are held to the same degree of care that men of ordinary prudence exercise in regard to their own affairs."7 And in that state, the Court of Appeals, as late as 1915, states the 6 Hun v. Cary, 82 N. Y. 65, 37 Am. Rep. 546. See also Seymour v. Spring Forest Cemetery Ass'n, 157 N. Y. 697, 51 N. E. 1094, aff'g 4 N. Y. App. Div. 359, 38 N. Y. Supp. 726; Scott v. Depeyster, 1 Edw. Ch. 513. 7 Hanna v. Lyon, 179 N. Y. 107, 71 N. E. 778. "8 rule that a director must take the same care of the corporate property "that men of average prudence take of their own property.' This is also the rule adopted in several of the other states.9 In regard to the directors of a bank, the Appellate Division of the Supreme Court of New York, in the third department, expressed itself as follows: "If the by-laws require monthly meetings, they must make diligent effort to be present thereat. They must give their best efforts to advance the interest of the corporation, both by advice and counsel and by active work on behalf of the corporation when such work may be assigned to them. If at their meetings, or otherwise, information should come to them of irregularity in the proceedings of the bank, they are bound to take steps to correct these irregularities. The law has no place for dummy directors. They are bound generally to use every effort that a prudent business man would use in supervising his own affairs, with the right, however, ordinarily to rely upon the vigilance of the executive committee to ascertain and report any irregularity or improvident acts in its management. 10 It has been suggested that this New York rule might be the only rule for the directors of some corporations and yet be extremely harsh for others, and that it might be advisable to divide corporations into several classes for this purpose.11 8 General Rubber Co. v. Benedict, 215 N. Y. 18, L. R. A. 1915 F 617, 109 N. E. 96. 9 Iowa. Toledo Sav. Bank v. Johnston, 94 Iowa 212, 220, 62 N. W. 748. Maryland. Fisher v. Parr, 92 Md. 245, 48 Atl. 621. But see Foutz v. Miller, 112 Md. 458, 76 Atl. 1111; Murphy v. Penniman, 105 Md. 452, 121 Am. St. Rep. 583, 66 Atl. 282. Michigan. Commercial Bank of Bay City v. Chatfield, 121 Mich. 641, 80 N. W. 712. Minnesota. Horn Silver Min. Co. v. Ryan, 42 Minn. 196, 44 N. W. 56. New Jersey. Campbell v. Watson, 62 N. J. Eq. 396, 50 Atl. 120; Williams v. McKay, 40 N. J. Eq. 189, 53 Am. Rep. 775; Ackerman v. Halsey, 37 N. J. Eq. 356, aff'd 38 N. J. Eq. 501. Rhode Island. See Hodges v. New England Screw Co., 1 R. I. 312, 346, 53 Am. Dec. 624. Texas. Seale v. Baker, 70 Tex. 283, 291, 8 Am. St. Rep. 592, 7 S. W. 742. Utah. Warren v. Robison, 19 Utah 289, 75 Am. St. Rep. 734, 57 Pac. 287. Virginia. Marshall v. Farmers' & Mechanics' Sav. Bank of Alexander, 85 Va. 676, 2 L. R. A. 534, 17 Am. St. Rep. 84, 8 S. E. 586. The general rule is that the directors or trustees of a corporation are bound to manage the affairs of the corporation with the same degree of care which is generally exercised by business men in the management of their own affairs. Marshall v. Farmers' & Mechanics' Sav. Bank of Alexander, 85 Va. 676, 2 L. R. A. 534, 17 Am. St. Rep. 84, 8 S. E. 586. 10 Per Presiding Justice Smith in Kavanaugh v. Gould, 147 N. Y. App. Div. 281, 288, 131 N. Y. Supp. 1059. 11 See article by M. C. Lynch in 3 Cal. Law Rev. 21, 29, 40. It has also been suggested that this rule as applied to the executive officers of a corporation, e. g., the cashier of a bank, would be a just and reasonable one, but that it should not be required that directors shall devote the same amount of attention to the affairs of the corporation as the executive officers.12 It has also been said, in regard to this New York rule, that “it is doubtful if the courts that have formally adopted such criterion have ever really determined the question of the directors' liability by reference to it." 13 However, there is some practical importance in the distinction. Those courts which follow the Pennsylvania rule, doubtless would allow evidence of custom of directors of other banks in the same city, or perhaps in other nearby cities, to show that the conduct of the directors was the same as that of directors in other banks, while the courts following the New York rule might reject such evidence. § 2451.Care required as that of ordinarily prudent men under similar circumstances. On the other hand, it is held in the federal courts, in Pennsylvania and some other states, that the degree of care required of a director is not the same ordinary care that he takes of his own affairs but is the ordinary care of a director of a corporation in a like business, or, as it is sometimes put, the degree of care an ordinarily prudent man would exercise under similar circumstances. This question was considered at length in a very able opinion of the Supreme Court of Pennsylvania in 1892, where the rule laid down in an earlier case was approved.14 In the later case, Chief Justice Paxson said, in regard to directors of a bank (and the same rule applies in that state to directors of other corporations); "It cannot be the rule that the director of a bank is to be held to the same ordinary care that he takes of his own affairs. He receives no compensation for his services. He is a gratuitous mandatary. His principal business at the bank is to assist in discounting paper, and for that purpose he attends at the bank at stated periods-generally once or twice a week-for an hour or two. The condition of the bank is then laid before him, in order that he may know how much money there is to loan. Once or twice a year there is an examination of the 12 Note in 55 L. R. A. 751, 756. 13 Note in 55 L. R. A. 751, 756. 14 Swentzel v. Penn Bank, 147 Pa. St. 140, 15 L. R. A. 305, 30 Am. St. Rep. 718, 23 Atl. 405, approving In re Spering's Appeal, 71 Pa. St. 11, 10 Am. Rep. 684. See also Loan Society of condition of the bank, in which he participates. The cash on hand is counted, the bills receivable and securities examined, to see whether they correspond with the statement as furnished by the officers. Beyond this he has little to do with either the cash or the books of the bank. They are in the care of salaried officials, who are paid for such services, and selected by reason of their supposed integrity and fitness. To expect a director, under such circumstances, to give the affairs of the bank the same care that he takes of his own business is unreasonable, and few responsible men would be willing to serve upon such terms. In the case of a city bank, doing a large business, he would be obliged to abandon his own affairs entirely. A business man generally understands the details of his own business, but a bank director cannot grasp the details of a large bank without devoting all his time to it, to the utter neglect of his own affairs. In regard to what is ordinary care, regard must be had to the usages of the particular business. Thus if the director of a bank performed his duties as such in the same manner as they were performed by all other directors of all other banks in the same city, it could not fairly be said that he was guilty of gross negligence. And care must be taken that we do not hold mere gratuitous mandataries to such a severe rule as to drive all honest men out of such positions. Holding, then, the rule to be, that directors who are gratuitous mandataries are only liable for fraud, or for such gross negligence as amounts to fraud, it remains but to apply this principle to the facts of this case." This is, in effect, the rule adopted by the Supreme Court of the United States in holding the degree of care required is that which ordinarily prudent and diligent men would exercise "under similar circumstances, and in determining that, the restrictions of the statute and the usages of business should be taken into account." 15 "Under similar circumstances," as the term is used therein, means, it would seem, what a reasonably prudent person would himself do if he was a director in the corporation; and this view is fortified by a later holding in a lower federal court that the true standard is that 15 Briggs v. Spaulding, 141 U. S. 132, 152, 35 L. Ed. 662. See also Warner v. Penoyer, 91 Fed. 587, 44 L. R. A. 761, rev'g 82 Fed. 181; Mutual Bldg. Fund & Dollar Sav. Bank v. Bossieux, 4 Hughes 387, 3 Fed. 817. In case of the president and manag ing officer of a bank, a federal court, however, said that he must exercise such care "as a careful man would exercise in his own affairs of like magnitude and importance." Stearns v. Lawrence, 83 Fed. 738, 746. |