porate officers which the corporation could have maintained; and hence decisions holding that a receiver may sue officers for negligenceare not authorities in favor of such actions by creditors.51 If a corporation is insolvent, and an action is brought by a receiver, the right to recover is seldom disputed on the ground that a creditor cannot recover for mismanagement, but generally a recovery is had without any such question being urged.52 General creditors may sue through the receiver to hold the corporate officers individually liable for mismanagement although neither the stockholders nor bondholders are complaining, since the general creditors "have as much right as the stockholders or the bondholders to be protected against the fraud and negligence of the directors." 53 § 2572. Necessity for injury. The rule that loss is necessary to authorize an action against officers individually for mismanagement, as applied to actions by the corporation,54 is equally applicable where the action is brought by creditors of the corporation. Thus directors are not personally liable to creditors because they engage in an ultra vires business where no part of the assets are lost by the directors in the business done outside of its corporate powers and the creditors are in no wise prejudiced thereby.55 So creditors cannot, it seems, recover from corporate officers because of defects in regard to cash payments for stock to enable it to commence business, where it is not shown that such acts caused any loss to the corporation or brought about its insolvency.56 And creditors cannot complain of acts of the directors or other officers, as a diversion or waste of the corporate assets in fraud of creditors, where they transfer the corporate assets to another corporation but receive in lieu thereof property of greater value.57 § 2573. Wrongful act or omission as essential to liability. The directors or other officers of a corporation are not liable to creditors merely because assets of the corporation have been misapplied or lost, without more. The misapplication or loss must have been due to 51 See Hun v. Cary, 82 N. Y. 65, 79, 37 Am. Rep. 546, and also § 2676, infra. 52 See New Haven Trust Co. v. Doherty, 74 Conn. 353, 50 Atl. 887. 53 Howland v. Corn, 232 Fed. 35, 43. 54 See § 2407, supra. 55 Dietrich v. Rothenberger, 25 Ky. L. Rep. 338, 75 S. W. 271, holding issuance of "certificate of deposit" not engaging in banking business. 56 Land Title & Trust Co. v. Connolly, 233 Pa. 1, 81 Atl. 903. 57 Force v. Age-Herald Co., 136 Ala. 271, 33 So. 866. their fraudulent or wilful act, or to culpable negligence or inattention in the performance of their duties. § 2574. Liability for nonfeasance or negligence, i. e., mismanagement-In general. Take the case of a director or other corporate officer, and concede that he has been guilty of some act of nonfeasance or negligence which would give the corporation, or stockholders in a proper case, the right to recover against him, the question then. arises as to whether, under such circumstances, a creditor of the corporation may enforce liability either suing alone for his own benefit or suing in a representative capacity. In regard to this matter, there is much conflict of opinion, and in addition it is diffi cult, if not impossible, to determine if there is any difference in the law applicable according to whether the creditor sues in equity to enforce a loss primarily to the corporation, or whether he sues at law to recover damages solely for his own benefit. If there is one question more difficult than another, in regard to the liability of corporate officers, it is this question as to their liability to creditors where the injury is primarily to the corporation itself. The two great causes of confusion are the attempts of some courts to draw a line between nonfeasance and misfeasance, and to deny liability to creditors for the former, and the conflict among the courts as to whether directors are trustees for creditors, as to which reference has already been made.58 In no branch of corporate law have the courts so confused the law which should govern as in the decisions relating to the liability of officers to creditors for negligent mismanagement. The situation is this: corporate officers cause loss to the corporation by their negligence in managing it and it becomes insolvent whereupon, generally after the receiver or other representative of the corporation has refused to sue, one or more creditors, either individually, or on behalf of all the creditors, sue the officers for their negligence. The creditors have been injured by the corporation becoming insolvent wholly or in part because of such mismanagement, but the primary injury was to the corporation itself, and it could have sued therefor before it went into the hands of a receiver or other representative, and the receiver or other representative could have sued therefor. Now it would seem too clear for argument that in such a case a creditor may sue and recover in the right of the corporation, in the old-fashioned form of remedy known as a creditor's suit, where the representative refuses to sue, on the theory that the right of the 58 See § 2271, supra. corporation to sue was a chose in action which was an equitable asset which may be reached by a creditor's suit.59 However, the courts have for the most part wholly disregarded the point as to whether the creditor sued in the right of the corporation or merely as an individual, and have decided the question according to the view of the particular court as to whether directors are trustees for the creditors of the corporation or else have denied the right to recover on the theory of nonfeasance. The rule which should govern this class of actions has been so well stated by Mr. Zane in his treatise on the law of Banks that it is stated here at length as follows: "But the law also recognizes that the capital stock and assets of a corporation constitute the security of the corporation's unsecured creditor, just as the debtor's property is the sole security of the debtor's unsecured creditor; and since the officers of the corporation have no right to absorb or give away this capital stock or assets, where they commit culpable acts which cause loss to the corporation, the creditor can follow by a creditor's bill that capital stock or assets into the hands. of any one who is not a purchaser for value, or, if the corporation's property has so passed, may hold those who are guilty of wrongful conduct in disposing of the corporation's property. This is simply the case of following by creditor's bill the assets of the debtor, or, if they cannot be followed, then it is the case of subjecting the debtor's right of action against his wrongly acting agent to creditor's bill." 60 If the director or other corporate officer is considered merely as an agent, then the question which generally arises is whether a corporate officer is liable to creditors for nonfeasance as distinguished from misfeasance-a question governed by the general rules as to agents.61 If the director or other corporate officer is considered merely as a trustee, then the question, according to most courts, is whether, conceding he is a trustee for the corporation and its stockholders, he is also a trustee for creditors of the corporation. In a New Jersey case, the court said that, in such cases where a bank and its depositors were injured, "it is the corporate body itself that primarily has been wronged, and reparation is due immediately 59 This question is discussed at length and the same conclusion reached in Zane, Banks and Banking, § 86. 60 Zane, Banks and Banking, § 84, stating, however, that the "courts have obscured the subject so much by fuliginous expressions in regard to IV Priv. Corp.-29 bank directors being trustees for the creditors, and the capital stock of a corporation being a trust fund, that it is devious work to find one's way among the cases. 61 See 2 Clark & Skyles, Agency, § 594 et seq. to it and not to the depositors. The depositors are but creditors of the corporation, and the moneys in question are not their moneys. It is true that as the directors are alleged to be the delinquent parties who are sought to be charged with the liability to make good the losses in question, these depositors have a footing in court to such redress in this matter, but in such proceeding the corporation, or in case of its insolvency, its receiver, must be a party, for it is in right of such corporate body that such a course of law is alone to be vindicated." 62 This view is also supported by dicta in a Wisconsin case.63 But an instance of failure to follow the logical rule is found in an Alabama case where, notwithstanding the frame of the bill in equity was that of a common creditors' bill, the court held that directors were not liable to creditors for mismanagement unless amounting to fraud.64 Some of the decisions holding that an individual creditor may sue for his sole benefit could well have been decided on the theory that he suffered injury not common to the other creditors, and was therefore entitled to sue just the same as any other person not a creditor.65 It is necessary to distinguish suits brought by persons who are both creditors and stockholders, where reliance for recovery is placed mainly, if not entirely, upon their rights as stockholders.66 § 2575. Minority rule. The minority rule is that creditors of corporations cannot, in general, maintain an action against directors for default in duty owed to the corporation, although the creditors may be thereby injured. In other words, some courts hold that mere creditors of an insolvent bank or other corporation cannot sue, even in equity, to hold the directors or other officers liable for losses due to mere negligence, unless so provided by statute, although a cause of action therefor may exist in favor of the corporation, on the ground that there is no trust relation between the officers and creditors.67 62 Chester v. Halliard, 36 N. J. Eq. 313, 316. 63 Killen v. Barnes, 106 Wis. 546, 562, 572, 82 N. W. 536, where the court said, while holding that a creditor could not sue in his own right, that "nevertheless a creditor may maintain an action to enforce such liabilities in the right of the corporation, or of the person in whom such right is vested, if the necessities of the case so require.'' See also notes in 45 L. R. A. (N. S.) 421, 3 L. R. A. (N. S.) 438. 64 Wilson v. Stevens, 129 Ala. 630, 87 Am. St. Rep. 86, 29 So. 678. 65 For instance, see United Society v. Underwood, 9 Bush (Ky.) 609, 15 Am. Rep. 731. 66 See, for instance Halsey v. Ackerman, 38 N. J. Eq. 501, 509. 67 Iowa. United States Fidelity & Guaranty Co. v. Corning State Sav. Bank, 154 Iowa 588, 45 L. R. A. (N. "The directors are agents or representatives of the entire body of stockholders," said the court in a North Dakota case, and the relationship between the corporation and the directors is that of principal and agent. The agency of course implies a trust, but the obligations imposed by the trust are solely to the corporation whose agents and trustees they are, and like all other agents they are accountable for their stewardship to their principal alone. Creditors of the corporation are utter strangers to the obligation of the directors to the corporation." 68 In the latter case, a director, although knowing that his bank was insolvent, took no steps to close it or to announce its insolvency. Plaintiff became a surety on a bond given by the bank to obtain deposits of county funds, without knowing of such insolvency, and later was compelled to pay the bond. He sued the director and sought to recover on the ground, inter alia, of negligence of the director. There was no proof of fraud. The court, after stating that directors are not trustees for the creditors, held that mere gross neglect by the director in not attempting to have S.) 421, 134 N. W. 857, reviewing New Jersey. Landis v. Sea Isle City New York. Moran v. Vreeland, 81 Misc. 664, 143 N. Y. Supp. 522; Branch v. Roberts, 50 Barb. 435. Oregon. See Devlin v. Moore, 64 Ore. 433, 130 Pac. 35. Tennessee. Deaderick v. Bank of Commerce, 100 Tenn. 457, 463, 45 S. W. 786. West Virginia, Zinn v. Mendel, 9 W. Va. 580. Mismanagement, without actual fraud, does not make directors personally liable to creditors. Wilson v. Stevens, 129 Ala. 630, 87 Am. St. Rep. 86, 29 So. 678. The vice president is not liable to third persons for negligence or nonfeasance. Ray County Sav. Bank v. Hutton, 224 Mo. 42, 123 S. W. 47. * * * If the corporation is solvent, corporate directors or other officers, according to the Iowa Court, are neither the agents nor trustees of the creditors. They are not answerable to them, either for the management of the affairs of the company, or the disposition they may make of its property, unless made so either by the provisions of the charter or some general statute. While the corporation is solvent, and continues in business, the creditor has no interest in or lien upon the property by virtue of the fact merely that he is a creditor. The ground of the complaint is that by their mismanagement of its affairs they have reduced it to insolvency. That they are not answerable to the creditors for such mismanagement is clear, both upon principle. and authority." Frost Mfg. Co. v. Foster, 76 Iowa 535, 41 N. W. 212. * * * 68 Hart v. Evanson, 14 N. D. 570, 575, 3 L. R. A. (N. S.) 438, 105 N. W. 942. |