E. Liability of Directors or Other Officers for Acts of Co-director or Other Officer

§ 2472. General considerations. The question of liability of one officer for the act of another may arise where it is sought to hold a director or directors liable (1) for acts or omissions of co-directors, or (2) for acts or omissions of officers or agents other than co-directors, or where it is sought to hold (3) an officer other than a director for acts or omissions of other officers or agents. The alleged negligence of directors, for which it is sought to hold them liable where loss has resulted from the misconduct of a cashier or other executive officer, is variously alleged, but the most usual grounds relied upon are one or more of the following: negligence in appointing an incompetent or untrustworthy person to the office, negligence in failing to require a. fidelity bond from the officer, negligence in failure to appoint an executive committee, in case of a bank, to examine the books of the bank, and to pass upon loans made by the bank, negligence in supervising loans and overdrafts, in case of a bank, negligence in failing to examine the books of the corporation, and negligence in failure to attend meetings of the directors.

The tendency of the courts, especially the Supreme Court of the United States and the lower federal courts, has been to be very lenient towards directors who have not been guilty of affirmative misconduct but who have merely been guilty of acts of omission. At the same time, the tendency of the later decisions, in most of the courts, is to hold directors to a more strict accountability, and to serve notice on "dummy" and "figurehead" directors that they cannot stay away from directors' meetings as a practice, or rely entirely upon others to attend to the corporate business, and escape liability for the wrongful acts of omission or commission of other directors or officers.

The liability of an agent to his principal for acts of subagents is considered at length in textbooks on Agency,92 as is the liability of agents for the neglect of co-agents.93

§ 2473. Higher officers not insurers. the fidelity of other officers or agents

Banking Act defining the duties of directors does not relieve them from their common-law liability for failure to be honest and diligent. Allen v. Luke, 163 Fed. 1018.

Directors are not insurers of of the corporation, including 92 See 1 Clark & Skyles, Agency, §§ 436-990.

93 See 1 Mechem, Agency (2nd Ed.), § 1289.

those they have themselves appointed to the position. The directors of a corporation, it was said in the Supreme Court of the United States, "are not insurers of the fidelity of the agents whom they have appointed, who are not their agents but the agents of the corporation; and they cannot be held responsible for losses resulting from the wrongful acts or omissions of other directors or agents, unless the loss is a consequence of their own neglect of duty, either for failure to supervise the business with attention or in neglecting to use proper care in the appointment of agents.'' 94

§ 2474. Matters material to solution of question-In general. Whether directors may depend upon subordinates, and the extent to which they may so depend, at least as to all ordinary matters and questions of detail, depends, of course, to some extent, upon the magnitude of the business and the exigencies of the case. But the rule as to liability of directors for acts of co-directors, or of directors for acts of other officers, or of other officers for acts of inferior officers, seems to be not affected by the element whether the liability is sought to be enforced by the corporation or stockholders, or by creditors of the corporation, provided it be conceded that creditors may recover for mere nonfeasance.

§ 2475.- Liability as dependent upon kind of corporation involved. Most of the cases which have been decided involve the liability of bank directors, and in some of them special stress has been laid on the fact that the bank was a savings bank in which were the savings of poor people. And it is submitted that the courts do, and should, hold directors of banks, especially savings banks, to the duty of a more rigid supervision over its officers who handle large sums of money daily and are subjected to great temptation, than in case of a corporation where the handling of money is merely the handling of the money of the corporation and represents a very small part of the actual work of the company. In any event, no higher degree of care should be imposed upon directors of mercantile corporations, in regard to supervision, than is imposed upon directors of banks.95

§ 2476. Grounds of liability. That a director or other officer may be liable for the misdeeds of another director or officer, under some

94 Chief Justice Fuller, in Briggs v. Spaulding, 141 U. S. 132, 35 L. Ed. 662.

95 Virginia-Carolina Chemical Co. v. Ehrich, 230 Fed. 1005, 1015.

circumstances, admits of no controversy.96 This liability is sought to be enforced not on the theory of respondeat superior, but on the ground of negligence of the directors or other superior officer in not supervising the acts of the co-director or subordinate officer or agent. Officers and agents appointed by the directors or other officers are agents of the corporation and not of the appointing officer or officers, and the latter cannot be held liable on the theory of agency. However, where directors personally and knowingly derive a benefit from the fraud of a subagent they may be held liable on the ground that he thereby becomes in a sense their agent.97 Ordinarily, however, the only grounds upon which directors or other officers can be held liable for the acts of other officers are that (1) they participated therein, or (2) were negligent in supervising the corporate business,98 or (3) were negligent in the appointment of the wrongdoer.99

§ 2477. Liability as dependent upon lack of supervision-In general. To be liable for acts of other officers not directors, a director must, where he did not actually participate in the wrong, be guilty of negligence, i. e., want of ordinary or reasonable care.1 Doubt

96 United States. 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 398, 3 Fed. 817.

California. San Pedro Lumber Co. v. Reynolds, 121 Cal. 74, 53 Pac. 410. Kentucky. Savings Bank of Louisville's Assignee v. Caperton, 87 Ky. 306, 12 Am. St. Rep. 488, 8 S. W. 885; Dunn's Adm'r v. Kyle's Ex'r, 14 Bush 134.

Missouri. Union Nat. Bank v. Hill, 148 Mo. 380, 71 Am. St. Rep. 615, 49 S. W. 1012.

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.

97 King v. Livingston Mfg. Co., 192 Ala. 269, 68 So. 897; Re Traders Trust Co., 26 Dom. L. R. (Can.) 41, 47. 98 See $2477 et seq., infra. 99 See § 2485, infra.

1 If the exercise of ordinary care on the part of the directors would have prevented the loss, they are liable. Mutual Bldg. Fund & Dollar Sav. Bank v. Bossieux, 3 Fed. 817.

If the directors act in good faith and with ordinary diligence in their general supervision, they are not liable for secret losses resulting from secret speculations and secret false entries of the cashier. Mason V. Moore, 73 Ohio St. 275, 4 L. R. A. (N. S.) 597, 4 Ann. Cas. 240, 76 N. E. 932.

While it is not incumbent upon the directors to give their time to the details of current business, they are under obligation to give to the corporate management such time and attention as will enable them to know at all times what the officers in charge of the corporation and what their fellow directors are doing, and what disposition is being made of the corporate funds and property. Fisher v. Parr, 92 Md. 245, 48 Atl. 621.

less all the courts agree that the responsibility of a board of directors, or of an individual director, does not end with the appointment of honest and capable men to the executive offices, and that ordinary care on the part of directors requires reasonable oversight and supervision. No court, it is submitted, takes the stand that

a director may escape liability where he utterly failed to exercise any supervision over corporate affairs and officers, but it is unanimously held that directors are liable for negligence, under ordinary circumstances, where the loss or injury is due to their total failure to in any way supervise the acts of the recreant officer,* especially in case of directors of banks.5 That corporate directors owe a duty of supervision, to some extent, of the acts of executive officers and other officers and agents to whom they have delegated certain authority is not disputed, and the same thing is true in respect to corporate officers not directors, so far as officers or agents under them are concerned. On the other hand, it is not disputed, of course, that directors are not obliged to investigate every minor detail of the business in order to see that the officers and agents are properly performing their duties. The important question is how far must directors go, and what must they do, to fulfil this duty of supervision, and it is self-evident that it cannot be precisely defined because dependent to so great an extent upon the circumstances of the particular case. It may be said, however, that generally the efforts to hold directors liable on such ground have been futile; and many of the courts have been very lenient with directors where they did not actively participate in the wrongdoing nor have any reason to suspect the recreant officer. The important question is what is meant by "reasonable supervision." Under the New York rule that directors must exercise the same care that an ordinarily prudent person would exercise over his own affairs, it would seem that "reasonable supervision" means something more than most of the courts are inclined to hold the directors to. Suppose there is no ground for suspicion of the

officers are clearly not liable for losses of money or property due to theft, embezzlement or accident. Mowbray v. Antrim, 123 Ind. 24, 23 N. E. 858; Vance v. Phoenix Ins. Co., 4 Lea (Tenn.) 385.

"That which they ought, by proper diligence, to have known, as to the general course of business in the bank, they may be presumed to have known in any contest between the corporation and those who are justified by the circumstances in dealing with its officers upon the basis of that

course of business.'' Martin v. Webb, 110 U. S. 7, 15, 28 L. Ed. 49.

4 Directors of an insurance company cannot escape liability for the purchase of worthless negotiable paper by delegating the selection of the paper to the president. Wait v. McKee, 95 Ark. 124, 128 S. W. 1028.

5 Ellis v. H. P. Gates Mercantile Co., 103 Miss. 560, 43 L. R. A. (N. S.) 982, Ann. Cas. 1915 B 526, 60 So. 649.

6 See 2450, supra.