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required to surrender it for cancellation. In a recent case the Court of Appeals of New York held that where plaintiff, a corporation, practically owned a subsidiary company, and defendant, who was a director of the plaintiff company, had exclusive knowledge that the manager of the subsidiary company was about to loot it, but did not warn plaintiff of the fact, he was liable for a breach of his duty as director.9

G. Misappropriation, Conversion or Diversion of Corporate

Assets

§ 2505. General rules. The fiduciary relation of the corporate officers to the corporation and its stockholders as a whole imposes. upon them the obligation to serve the purpose of their trust with fidelity, and forbids the doing of any act by them, or by any one of them, by which the assets of the corporation are wrongfully diverted from corporate purposes.10 There is little or no controversy as to the liability in general of directors or other corporate officers for misappropriation, diversion or conversion of corporate assets. Such a liability exists 11 and may be enforced by the corporation,12

8 Trask v. Chase, 107 Me. 137, 77 Atl. 698.

9 General Rubber Co. v. Benedict, 215 N. Y. 18, L. R. A. 1915 F 617, 109 N. E. 96, aff 'g 164 N. Y. App. Div. 332, 149 N. Y. Supp. 880.

10 Hanson Sheep Co. v. Farmers' & Traders' State Bank, 53 Mont. 324, 163 Pac. 1151, applying rule to president of corporation.

11 United States. Cooper v. Hill, 94 Fed. 582; Cockrill v. Abeles, 86 Fed. 505; Cockrill v. Cooper, 86 Fed. 7.

Maryland. Murphy v. Penniman, 105 Md. 452, 121 Am. St. Rep. 583, 66 Atl. 282.

Michigan. Holland Furniture Co. v. Knooihuizen, 163 N. W. 884.

Minnesota. See Shearer v. Barnes, 118 Minn. 179, 136 N. W. 861, following trust property into hands of third person.

New York. Bowers v. Male, 186 N. Y. 28. 78 N. E. 577; Rathbone v. Ayer, 84 App. Div. 184, 82 N. Y. Supp. 239; Drucklieb v. Harris, 84 Misc. 291, 147 N. Y. Supp. 298.

Texas. Allen v. Hutcheson, 57 Tex. Civ. App. 71, 121 S. W. 1141.

Vermont. First Nat. Bank of Brandon v. Briggs' Estate, 70 Vt. 599, 41 Atl. 586.

Washington. See First Nat. Bank v. Gaddis, 31 Wash. 596, 72 Pac. 460.

"It is settled that funds of a corporation can be lawfully used for corporate purposes only, and if misappropriated by the directors, they and whoever with notice participates with them are jointly and severally liable to the corporation for the loss and damage." Corey v. Independent Ice Co., 226 Mass. 391, 393, 115 N. E. 488.

The fact that the treasurer of a brewing company deposits money in a trust company of which he was also treasurer, and mixes it so that the amount deposited cannot be determined, does not make any one except himself liable to the brewing company, and hence the trust company is not liable. Elk Brewing Co. v. Neubert, 213 Pa. 171, 62 Atl. 782.

12 Corey v. Independent Ice Co., 226

or by the stockholders in a proper case,13 and may also be enforced, in some cases, by creditors of the corporation.14 Likewise, but on a different theory, a third person whose property has been appropriated by a corporate officer may sue the officer to recover it or for damages.15 Thus, the president of a bank who has converted a deposit is personally liable to the depositor, and he may be sued upon an implied promise for money had and received.16

Directors are liable for actual misfeasance in appropriating corporate funds to their personal use, where that was the legal effect of their acts no matter by what name they were called.17 An outgoing treasurer cannot retain corporate property to pay its debts as voted by the corporation.18 So corporate officers cannot give away corporate assets.19 Thus, a director who gives part of the capital of the solvent corporation to another director is liable in an action at law to the corporation for wasting its assets.20

§ 2506. Effect of officer owning all or most of the stock. If an officer is the owner of all the stock of a corporation, it seems that he may use the corporate assets as he sees fit,21 and there can be no misappropriation of corporate assets by him; 22 but if there is even one share of stock outstanding he cannot use the corporate assets to pay his individual debts without the consent of the holder of such one share of stock.23 Directors or other officers who misappropriate funds are liable to the corporation just the same as if they had taken the money or property of an individual, notwithstanding they owned substantially all of the stock.24

If the president of a corporation, although he owns a large part of the corporate stock, takes property of the corporation for his

Mass. 391, 115 N. E. 488; Atlantic City & S. Gas & Fuel Co. v. Johnson, 81 N. J. Eq. 351, 514, 88 Atl. 163.

13 Goodbody v. Delaney, 82 N. J. Eq. 140, 91 Atl. 724.

14 See $ 2579-2583, infra.

15 See §§ 2539-2541, infra.

16 Weems v. Melton, 47 Okla. 706, 150 Pac. 720.

17 Bowers v. Male, 186 N. Y. 28, 78 N. E. 577.

18 Seven Star Grange, No. 73, Patrons of Husbandry v. Ferguson, 98 Me. 176, 56 Atl. 648.

19 Rankin v. Bates County Inv. Co., 238 Mo. 399, 141 S. W. 1118.

20 Hazard v. Wright, 201 N. Y. 399, 94 N. E. 855, rev'g 138 N. Y. App. Div. 441, 122 N. Y. Supp. 837.

21 Central Mfg. Co. v. Montgomery, 144 Mo. App. 494, 129 S. W. 460.

22 Central Mfg. Co. v. Montgomery, 144 Mo. App. 494, 129 S. W. 460.

23 Central Mfg. Co. v. Montgomery, 144 Mo. App. 494, 129 S. W. 460.

24 Saranac & L. P. R. Co. v. Arnold. 167 N. Y. 368, 60 N. E. 647, rev'g 41 N. Y. App. Div. 482, 58 N. Y. Supp. 710. See also Great Western Min. & Mfg. Co. v. Harris' Estate, 111 Fed. 38; Winchester v. Howard, 136 Cal. 432, 89 Am. St. Rep. 153, 69 Pac. 77,

individual use without paying for it, the law raises an implied promise on his part to pay the company what it is reasonably worth.25

§ 2507. Consent or ratification. If all the stockholders of a corporation consent, and it is not detrimental to creditors, officers may appropriate corporate assets.26 It follows that if there are no stockholders except the directors and officers, the latter may, of course, by unanimous consent, give away corporate property, where the rights of creditors are not impaired.27 However, stockholders cannot be said to ratify misappropriations by corporate officers where they had no knowledge thereof.28 Moreover, the direct or indirect misappropriation of corporate assets to the individual use or benefit of corporate officers is incapable of being authorized or ratified by a vote or any act or omission of a majority, less than the whole, of the stockholders.29 In other words, the ratification by a majority of the stockholders of a misappropriation of corpo

64 Pac. 692; Hicks v. Steel, 142 Mich. 292, 4 L. R. A. (N. S.) 279, 105 N. W. 767; Luther v. C. J. Luther Co., 118 Wis. 112, 99 Am. St. Rep. 977, 94 N. W. 69.

25 Henry R. Worthington v. Worthington, 100 N. Y. App. Div. 332, 91 N. Y. Supp. 443.

26 Jorndt v. Reuter Hub & Spoke Co., 112 Mo. App. 341, 87 S. W. 29.

Where all the real stockholders and a majority of the directors agree to a particular appropriation of the corporate funds, and that leaves the corporation still solvent, no one can complain. Watts v. Gordon, 127 Tenn. 96, 153 S. W. 483.

27 Jorndt v. Reuter Hub & Spoke Co., 112 Mo. App. 341, 87 S. W. 29.

Thus, if the corporate officers are the only stockholders, and they allowed all the officers to get their fuel from the cast-off products of the foundry, the corporation cannot recover the value of the stuff taken by the president as a defense to his claim for salary, on the theory of a tortious conversion. Jorndt v. Reuter Hub & Spoke Co., 112 Mo. App. 341, 87 S. W.

29.

28 Von Arnim v. American Tube Works, 188 Mass. 515, 74 N. E. 680.

Mere silence by a stockholder is not a ratification of a misappropriation of corporate funds, where he had no knowledge of the misappropriation. Von Arnim v. American Tube Works, 188 Mass. 515, 74 N. E. 680. 29 Pollitz v. Wabash R. Co., 207 N. Y. 113, 100 N. E. 721; Continental Securities Co. v. Belmont, 206 N. Y. 7, 15, 18, 51 L. R. A. (N. S.) 112, Ann. Cas. 1914 A 777, 99 N. E. 138, 83 N. Y. Misc. 340, 144 N. Y. Supp. 801; Bagshaw v. Eastern Union Ry. Co., 7 Hare 114. To same effect, McConnell v. Combination Mining & Milling Co., 30 Mont. 239, 104 Am. St. Rep. 703, 76 Pac. 194.

"It is well settled that a misappropriation of the funds of a corporation cannot be ratified as against the rights of creditors by all the stockholders of the corporation, and that no such ratification, even by all but one of the stockholders, would be binding upon the corporation itself. Continental Securities Co. v. Belmont, 206 N. Y. 7, 18. 99 N. E. 138, 51 L. R. A. (N. S.) 112, Ann. Cas. 1914 A

rate funds does not bind a dissenting minority stockholder.30 Thus it is held that "nothing less than the unanimous action of the whole body of stockholders can authorize the use of the corporate credit for the benefit of an individual" and "nothing short of the unanimous action of the whole body can ratify such action after it is done." 31

§ 2508. Benefit to officer as immaterial. A bank teller who aids the cashier in taking the funds of the bank for the use of the cashier, under the directions of the cashier, is liable to the bank where he acted with knowledge, although he received none of the money.32

§ 2509. Illustrations of rules-In general. Of course, the treasurer must account for moneys received,33 as much as the cashier of a bank.34 So the president of a company may be required to account for corporate funds which have been misappropriated by him.35 The misappropriation may take the form of speculations with corporate funds.36 If the treasurer unlawfully carries the funds of the corporation into another state, he cannot relieve himself from liability by turning them over to a successor, where the

777; Pollitz v. Wabash R. R. Co., 207 N. Y. 113, 127, 100 N. E. 721." E. Moch Co. v. Security Bank of New York, 176 N. Y. App. Div. 842, 163 N. Y. Supp. 277.

30 Von Arnim V. American Tube Works, 188 Mass. 515, 74 N. E. 680; Theobald v. United States Rubber Co., 83 N. Y. Misc. 627, 146 N. Y. Supp. 597.

31 Gross Iron Ore Co. v. Paulle, 132 Minn. 160, 156 N. W. 268.

32 Hobart v. Dovell, 38 N. J. Eq. 553, 563.

33 Muhlhauser v. Cleveland Hospital for Women & Children, 21 Ohio Cir. Ct. 88, 11 Ohio Cir. Dec. 391; Equitable Savings & Loan Ass 'n v. Roland, 198 Pa. 643, 48 Atl. 866.

34 The cashier of a bank is liable to creditors where he uses corporate funds to buy his own stock, and a statute forbids banks to purchase their own stock. (United Securities Co. v. Ostenberg, 60 Colo. 249, 152

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The president of an insurance com pany has been held personally liable to policyholders for moneys paid out of the corporate funds to a newly elected manager for a list of the pol icyholders in a moribund company which shortly after went into the hands of a receiver, where such payment was in connection with and induced by a large increase of salary to the president. Moulton v. Field, 179 Fed. 673, aff'g 166 Fed. 607.

One who is the president and superintendent of a company cannot charge it with his expenses for dinner and entertair nents to prospective purchasers of stocks. Eber v. Alaska Mildred Gold Min. Co.. 167 Fed. 456. 36 Redmond v. Dickerson, 9 N. J. Eq. 507, 59 Am. Dec. 418.

[§ 2510 latter was elected at a stockholders' meeting illegally held in such other state instead of the state of incorporation.3 37

On the same theory, a salary whether fair or not, voted by the directors to one of their number, is unlawful, and he may be compelled to account therefor where he took part in the proceedings and his vote was essential to the adoption of the resolution.38 This . question is more fully considered in a subsequent chapter relating to compensation of officers.39 But a secretary of a corporation to whom a salary is unlawfully paid is not liable for misappropriation where he is not a director and was not connected in any way with the fraudulent misappropriation.40

It has been held that the seller of shares of stock to the treasurer of the corporation is not charged with notice that the treasurer is misappropriating corporate funds, where he gives in payment a check signed by him as treasurer of the corporation.41

§ 2510. Sale or transfer of corporate assets. A sale without authority makes the officer who made the sale personally liable.42 Thus, the directors are personally liable to the corporation for a diversion where they wrongfully transferred all its assets to a consolidated corporation.43 If the president of a corporation sells property constituting the only assets of the corporation, and thereafter obtains a cancellation of the purchase price mortgage so as to leave the corporation with practically no assets, he is personally liable for the purchase price.44 So a treasurer who distributes corporate moneys to himself and certain other stockholders who owned practically all of the stock of the corporation, is liable therefor to the corporation, where no dividend had been declared nor distribution au

37 Kent v. Honsinger, 167 Fed. 619. 38 Martin v. Santa Cruz Water Storage Co., 4 Ariz. 171, 36 Pac. 36; Wickersham v. Crittenden, 106 Cal. 327, 39 Pac. 602; McConnell v. Combination Mining & Milling Co., 30 Mont. 239, 104 Am. St. Rep. 703, 76 Pac. 104. 39 Infra, Chap. 43.

40 McConnell v. Combination Mining & Milling Co., 30 Mont. 239, 104 Am. St. Rep. 703, 76 Pac. 194, aff'd 31 Mont. 563, 79 Pac. 248.

41 Fillebrown v. Hayward, 190 Mass. 472, 77 N. E. 45.

42 The president of a corporation

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