protest upon the minutes, and by giving public notice. Until this means of exonerating himself was supplied by statute his position was more difficult. He could then only relieve himself by doing everything in his power to prevent the unlawful proceeding, even going so far as to begin an action, if he could not prevent it in any other way.'

,, 81

§ 2499. Where erring director practically controls corporation. The fact that the erring director is a man of reputed integrity and financial ability and that he practically controlled the bank does not relieve a co-director from the discharge of his official duty to the bank.82

§ 2500. Liability of directors for negligence of executive committee. The custom of boards of directors of appointing executive committees, in large corporations, is a reasonable one and to be approved, especially in the case of banks.83 In banks in large cities, it is the custom to intrust to the executive committee of the board the supervision of the detail management of the corporation; and in such a case the directors not on the executive committee ordinarily are not liable for the negligence or the like of the members of the executive committee. However, as has been stated, "this custom, however, does not relieve directors generally of all responsibility. 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 those 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." 84 Directors cannot escape liability by appoint

81 Northern Trust Co. v. Butchard, 35 Dom. L. R. 169, 175.

82 Citizens' Nat. Bank v. Blizzard, W. Va. 93 S. E. 338. 83 Stone v. Rottman, 183 Mo. 552, 82 S. W. 76.

84 Kavanaugh v. Gould, 147 N. Y. App. Div. 281, 131 N. Y. Supp. 1059, stating reason for rule to be that otherwise able men could not be procured as directors.

ing small committees from their number to superintend executive officers and dispose of unimportant detail and routine work, but must supervise, at least in a general way, their conduct.85 In some bank cases, however, directors who were members of the discount and examining committees of the board of directors of a bank have been held liable for defalcations of the cashier or other officer, on the ground of negligence in supervision, while directors not members of such committees have been held not liable.86

§ 2501. Liability of officers not directors for acts of other officersIn general. The question of the liability of officers not directors, for the misconduct of other officers or agents does not arise as often as does the one as to the liability of directors. However, for the most part, the same principles are applicable.87 Neither the president, treasurer nor secretary of a corporation are liable for the misconduct of each other in which they did not participate.88 The treasurer is not liable for a libel published by the directors merely because he paid the execution on the judgment against the corpora tion.89 A cashier who personally employed a bookkeeper is liable for the defaults of the bookkeeper during several years where the cashier was unable to attend to the business because of his continual drunkenness, but nevertheless continued to draw his salary.90 As to the liability of a cashier for the misconduct of subordinates, it has been held that he "is not an insurer of the honesty and fidelity of those who occupy subordinate positions in the bank, and he is not required to examine by actual inspection every original entry made by those under him, but his care extends to a general supervision of the books and affairs of the bank; and when

85 In such a case, a man of common prudence "might not look so closely into the affairs of the business as to detect concealed and isolated instances of wrong-doing, but he would SO familiarize himself with their workings that he would readily detect habitual looseness, carelessness, and wrong-doing." Williams v. MeKay, 46 N. J. Eq. 25, 18 Atl. 824.

86 Warner v. Penoyer, 91 Fed. 587, 593, 44 L. R. A. 761. *

87 A paying teller is liable to the bank for money stolen from it by coemployees, who were his subordinates,

IV Priv. Corp.-25

with his knowledge and connivance. Latimer v. Veader, 20 N. Y. App. Div. 418, 46 N. Y. Supp. 823.

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

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

90 Grant County Deposit Bank v. Points, 22 Ky. L. Rep. 114, 56 S. W. 662, where, however, bank was held not entitled to recover in part because of delay.

it is shown that he has exercised such diligence as a prudent man would in the control of those under him and in the supervision of their work, he has discharged his duty." 91

§ 2502. President. The president of a corporation is generally expected to exercise a more personal supervision than an ordinary director,92 at least where he devotes all or a large portion of his time to the corporate business and receives an adequate salary for his labor. He should, if in fact the financial manager of the corporation, restrain the treasurer if the latter deals with the corporate funds contrary to law.93 So where it is the duty of the president of a corporation to supervise its affairs, and take and keep bonds from subordinate officers, and he negligently fails to take the required bond from an officer who is intrusted with funds, and who becomes a defaulter, he is liable to the corporation for the loss.94 But it is not necessarily negligence nor improper for the president of a company to turn over corporate bonds, which the financial officer had intrusted to the president for sale, to the vice president for sale, and the president cannot be compelled to account for the proceeds received by the vice president.95 So it is held that the president of a small bank who receives no salary and lives upon his farm in the country, is not liable for mere omissions of duty, where the entire management was practically given over to the cashier.96

§ 2503. General manager. The duties of a general manager are more extensive than those of a mere director, and his liability for misdeeds of subordinates, as based on his negligence, is more extensive than the liability of a mere director for like misdeeds.97 This question of liability of one officer for the acts of another was ably considered at some length in a Wisconsin case where it was sought to hold the general manager of a corporation engaged in manufacturing wagons liable for funds withdrawn by the secretary of the company. On the one hand it was contended that the manager, as

91 Batchelor v. Planters' Nat. Bank, 78 Ky. 435, 446.

92 Davenport v. Prentice, 126 N. Y. App. Div. 451, 110 N. Y. Supp. 1056. 93 Com. v. Dow, 217 Mass. 473, 105 N. E. 995.

94 Pontchartrain R. Co. v. Paulding, 11 La. 41, 30 Am. Dec. 708.

95 Owego Gas Light Co. v. Boyer, 111 N. Y. App. Div. 140, 96 N. Y. Supp. 486.

96 First State Bank of Nortonville v. Morton, 146 Ky. 287, 142 S. W. 694.

97 San Pedro Lumber Co. v. Reynolds, 121 Cal. 74, 81, 82, 53 Pac.

410.

executive head of the business, was bound to know of and control every detail of every department of the company, and was liable for damages resulting from any act or omission which would have been negligent in one charged with the duty of such specific act. The other side contended that the field of activity delegated to the secretary, either by express by-law or the custom of the corporation, was wholly outside of the manager's responsibility; that they were co-ordinate officers, each independent and beyond the control of the other, and each responsible only for his own acts or omissions. The court held that neither theory was entirely right; that while the manager was not a mere co-ordinate of the secretary, yet the secretary and the bookkeeping force working under him were not a mere implement selected and entirely controlled by the manager; that the secretary and his account books were existing institutions when the manager took office, created by the board of directors, and in detail, at least, not controllable by the manager, except by appeal to the board; that nevertheless, since the conduct of that department was one of the elements involved in successful prosecution of the business, the manager owed the duty of such attention thereto and supervision thereof as the general prosperity of the enterprise demanded, subject to the limitations. suggested.98 Applying such general considerations to the facts of the particular case, the court held, inter alia, that the manager was guilty of negligence in failing to discover and thus in permitting the secretary to withdraw funds of the company in excess of his salary through a period of seven years; that, on discovery of the defaults, the manager was negligent in permitting him to remain in office and appropriate more funds for several months, under the belief that he might reform and reduce his indebtedness; but that the manager was not liable, however, for items entered upon the books on the day of the secretary's discharge, where only by accident could they have come to the manager's knowledge and where there was no proof of damage to the corporation.99

It was also held in that case that it cannot be said to be negligence for the general manager of a business of considerable magnitude "to rely upon trusted employees, justly supposed to be diligent and capable, for the mere ascertainment of the amount due upon an open account."1 In another case, a general manager was

98 Johnson v. Stoughton Wagon Co., 118 Wis. 438, 95 N. W. 394. Stoughton Wagon Co.,

99 Johnson v.

118 Wis. 438, 95 N. W. 394.

1 Johnson v. Stoughton Wagon Co., 118 Wis. 438, 95 N. W. 394.

held not liable for unknown misappropriations of a clerk employed by him, in purchasing an automobile, where the directors and stockholders had full knowledge of the employment and of the authority vested in the clerk.2

F. Fraud

§ 2504. General rule. Directors or other officers of a corporation are liable to the corporation for a loss to the corporation resulting from the fraud of such officers. This proposition is elementary and is not disputed. In fact the question has seldom arisen, since usually the liability is sought to be enforced either upon the ground of negligence, misappropriation or acts beyond the powers of the corporation. A corporation may recover damages for conspiracy from directors who obtained control of the corporation merely to ruin it and prevent it becoming a competitor of another corporation. A manager of a corporation is personally liable to a stockholder who is damaged by a fraudulent scheme of such officer and the corporation, whereby the officer secured a benefit through the corporation which had obtained money for stock sold to such stockholder, by ultimately gaining possession of its property.5

Directors or other officers of a corporation are clearly liable to it for any loss which it may sustain by reason of their refusal or failure to enter into a contract for its benefit, if they do not act in good faith; but directors are not liable for refusal to accept a proposition which, although advantageous to the corporation, was conditioned upon their resignation." It is a fraud for a majority of the directors who own less than a majority of the stock, to collusively issue stock to one of their number in order to obtain control by holding a majority of the stock, and such directors may be enjoined from voting or transferring such additional stock and be

2 Bastin v. Givens' Adm'x, 170 Ky. 201, 185 S. W. 835.

3 Salina Mercantile Co. v. Stiefel, 82 Kan. 7, 107 Pac. 774; Shepard v. Morgan, 123 N. Y. App. Div. 128, 108 N. Y. Supp. 379; Continental Securities Co. v. Belmont, 83 N. Y. Misc. 340, 144 N. Y. Supp. 801.

What constitutes breach of duty in general, see § 2424 et seq., supra.

In regard to banks, directors are liable for fraudulent conduct, "regardless of any statute, primarily to

the bank, and secondarily to its creditors, whom they have defrauded." 1 Bolles, Modern Law of Banking, p. 275.

4 Pennsylvania Sugar Refining Co. v. American Sugar Refining Co., 166 Fed. 254.

5 Heckendorn v. Romadka, 138 Wis. 416, 120 N. W. 257.

6 See Ritchie v. McMullen, 79 Fed. 522, McMullen v. Ritchie, 64 Fed. 522. 7 Bayles v. Vanderveer, 11 N. Y. Misc. 207, 32 N. Y. Supp. 1117.