that such an action will lie where the corporation has become insolvent, and the receiver or other proper officer neglects or refuses to sue, at least where the suit is a representative one brought on behalf of all the creditors.1 Thus, the New Jersey court has stated the rule as follows: "The corporation and its officers owe to their creditors this duty: not to divert the corporate property from the general purpose of paying the creditors. A violation of

this duty will entitle the creditors who suffer thereby to relief." 2 And depositors in a bank are creditors within this rule. Stated in another way, it is generally held that directors are liable to creditors for loss resulting from their malfeasance.4 Moreover, a suit for conversion of assets may be brought even after the company has been dissolved.5

In any event, a creditor may recover, as such, under the broad terms of some of the statutes enacted in New York, Wisconsin and a few other states.

gard to the rights of any other creditors.

A director who converts its property or diverts it to purposes other than corporate purposes is liable to creditors for the value of the property so converted or diverted. Barnard Mfg. Co. v. Ralston Milling Co., 71 Wash. 659, 129 Pac. 389.

Furthermore, it has been held that one director is liable to creditors for misappropriations by co-directors where the result of his negligent inattention to the corporate business. Nix v. Miller, 26 Colo. 203, 57 Pac. 1084, and see § 2493 et seq., supra.

But it has been held that directors and other officers do not stand in a fiduciary relation to the creditors of the corporation, and they are not individually liable to corporate bondholders for money received from persons to whom they had leased the corporate property. Young v. Haviland, 215 Mass. 120, 102 N. E. 338.

1 Shea v. Knoxville & K. R. Co., 6 Baxt. (Tenn.) 277.

It has been held in Colorado that where a director purchases corporate

property at a sale under a mortgage to which he is not a party, for a sum much less than its real value, he is personally liable to corporate creditors, in an action in the nature of a creditor's bill, to the extent of the excess, on the theory of a conversion of assets. Fishel v. Goddard, 30 Colo. 147, 69 Pac. 607, criticising West v. Hanson Produce Co., 6 Colo. App. 467, 41 Pac. 829.

2 Wilkinson v. Bauerle, 41 N. J. Eq. 635, 645, 7 Atl. 514.

3 Vujacich v. Southern Commercial Co., 21 Cal. App. 439, 132 Pac. 80.

4 Boyd v. Mutual Fire Ass'n of Eau Claire, 116 Wis. 155, 61 L. R. A. 918, 96 Am. St. Rep. 948, 94 N. W. 171, 90 N. W. 1086.

5 Lewisohn v. Stoddard, 78 Conn. 575, 63 Atl. 621.

6 Benge v. Eppard, 110 Iowa 86, 81 N. W. 183; Lilienthal v. Betz, 108 N. Y. App. Div. 222, 95 N. Y. Supp. 849, rev'd on other grounds 185 N. Y. 153, 7 Ann. Cas. 41, 77 N. E. 1002; Gores v. Day, 99 Wis. 276, 74 N. W. 787. See also §§ 2621, 2622, infra.

[§ 2583 § 2580.- Division of assets among stockholders. Independently of statute, if corporate officers divide the assets among stockholders when the corporation is insolvent or where the corporation is thereby rendered insolvent, such officers are personally liable for corporate debts, or at least to the extent of the amount of assets received by them. If the surplus after an execution sale of the corporate property is paid over to one who is both a director and treasurer who distributed it among stockholders, all the directors are personally liable to unpaid creditors to the extent of such payments.9

§ 2581. Distinguished from conversion of property belonging to complainant. Directors may be liable to third persons for conversion of the property of such third persons; 10 but this liability is not the same as the liability to creditors of the corporation for conversion of corporate property.11

§ 2582.

Acquisition by officers of corporate stock. Creditors may sue directors for the value of stock issued by themselves to themselves without a valuable consideration, on the theory of a conversion of the corporate assets. 12 Thus, illegally voting to themselves corporate stock in payment of promotion services is a conversion of assets for which the directors are personally liable.13

§ 2583.- Payment of dividends. Directors are liable to creditors of the corporation where the directors wilfully or negligently mis

7 United States. White, Potter & Paige Mfg. Co. v. Henry B. Pettes Importing Co., 30 Fed. 864.

Iowa. Swartley v. Oak Leaf Creamery Co., 135 Iowa 573, 113 N. W. 496. New Jersey. Mills v. Hendershot, 70 N. J. Eq. 258, 62 Atl. 542.

New York. Gilbert v. Finch, 173 N. Y. 455, 61 L. R. A. 807, 93 Am. St. Rep. 623, 66 N. E. 133. To same effect, although decided under a statute, see Darcy v. Brooklyn & N. Y. Ferry Co., 196 N. Y. 99, 26 L. R. A. (N. S.) 267, 134 Am. St. Rep. 827, 89 N. E. 461.

North Carolina. McIver v. Young Hardware Co., 144 N. C. 478, 119 Am. St. Rep. 970, 57 S. E. 169.

England. Re National Funds Assur. Co., L. R. 10 Ch. Div. 118; Moxham v. Grant, [1900] 1 Q. B. 88.

apply the assets of the corporation by payment of dividends, when there are no surplus profits out of which they may lawfully be paid.14 Payment of a dividend out of capital is a breach of trust which renders the directors jointly and severally liable. This matter is considered fully in a subsequent chapter in connection with the law relating to dividends.16

§ 2584. Ultra vires acts, including acts prohibited by statute. It has been noted that officers are liable to the corporation, or its stockholders in a proper case, for injuries resulting from officers acting ultra vires or in violation of a statute or the charter.17 It has been held, however, that a corporate creditor cannot hold an officer or agent of a corporation liable for a mere ultra vires act, as distinguished from a fraudulent transfer or misapplication of corporate assets.18 If the particular transaction by which the person suing became a creditor was itself ultra vires, i. e., beyond the power of the corporation, then the question whether the creditor can hold the corporate officers involved in the transaction personally liable is to be determined by the rules laid down in a preceding subdivision of this chapter.19 On the other hand, if the transaction with the creditor suing was within its eorporate powers, the directors or other corporate officers are not liable to such creditor

14 Lexington & O. R. Co. v. Bridges, 7 B. Mon. (Ky.) 556, 46 Am. Dec. 528; Gaffney v. Colvill, 6 Hill (N..Y.) 567; Scott v. Eagle Fire Co., 7 Paige (N. Y.) 198; Gunkle's Appeal, 48 Pa. St. 13; In re National Funds Assur. Co., 10 Ch. Div. 118. See also Gratz v. Redd, 4 B. Mon. (Ky.) 178. Compare Excelsior Petroleum Co. v. Lacey, 63 N. Y. 422; In re National Bank of Wales, [1899] 2 Ch. 629.

15 Northern Trust Co. v. Butchart, 35 Dom. L. R. (Can.) 169, 174.

Reliance on statements of officials held to preclude liability of directors for declaring dividend which decreased the capital. Re Owen Sound Lumber Co., 33 Dom. L. R. (Can.) 487.

16 Infra, chapter on Stockholders. 17 See 88 2434-2441, supra.

18 Force v. Age-Herald Co., 136 Ala. 271, 279, 33 So. 866.

Ultra vires or expressly prohibited acts of a solvent corporation, where not a fraud, give a creditor no cause of action against directors or other officers personally to recover his debt. Frost Mfg. Co. v. Foster, 76 Iowa 535, 41 N. W. 212.

This rule has been applied where directors contracted debts in excess of the debt limit fixed by the articles of incorporation. Frost Mfg. Co. v. Foster, 76 Iowa 535, 41 N. W. 212.

Directors are not liable to creditors for debts contracted in excess of the limit prescribed by the charter or statutes, unless the liability is imposed by the charter or by statute. Frost Mfg. Co. v. Foster, 76 Iowa 535, 41 N. W. 212; Randolph v. Ballard County Bank, 142 Ky. 145, 134 S. W. 165.

19 See § 2530, supra.

because at other times and with other persons they may have done business not authorized by its charter.20

The violation by directors of a statute making an act a felony has been held to create personal liability in favor of depositors in a bank, the violation being the receipt of deposits when the bank was insolvent.21

§2585. Fraud. Fraud is ground for a recovery by creditors against corporate officers, independently of any statute. Such fraud. may consist in the fact that the officers of a corporation organized it and contracted debts without subscribing for or paying in any of the capital stock, since in such a case the corporation is a mere shadow without substance.22 So where one-fourth of the capital stock is required to be paid in, in specie, before the directors of a bank can issue bank notes, the issuance of such notes by them at a time when practically nothing had been paid in on the stock, makes the directors liable to creditors for fraud, or breach of trust.23 Incurring a debt in excess of the debt limit is not a fraud upon a creditor who extends credit to the company, since by inquiry or examination the creditor might have ascertained the condition of the company.24

§ 2586. Liability for debts in general. The directors or other officers of a corporation are not liable for debts contracted in the name and on behalf of the corporation and which are binding upon it, unless they are expressly made liable by statute, or unless they also contract on their own behalf.25 This is true notwithstanding

20 Dietrich v. Rothenberger, 25 Ky. L. Rep. 338, 75 S. W. 271.

One dealing with a corporation cannot hold directors personally liable because in other transactions they acted beyond the powers of the corporation where the transaction with him was within the corporate powers. Dietrich v. Rothenberger, 25 Ky. L. Rep. 338, 75 S. W. 271.

21 Baxter v. Coughlin, 70 Minn. 1, 72 N. W. 797.

the minimum capital stock named in the charter.

23 Schley v. Dixon, 24 Ga. 273. 24 Frost Mfg. Co. v. Foster, 76 Iowa 535, 41 N. W. 212.

25 United States. Knower v. Haines, 31 Fed. 513.

Iowa. Frost Mfg. Co. v. Foster, 76 Iowa 535, 41 N. W. 212.

Missouri. Kritzer v. Woodson, 19 Mo. 327.

Oregon. Falls City Lumber Co. v. Watkins, 53 Ore. 212, 99 Pac. 884. Texas. Snyder v. Wiley, 59 Tex.

22 Burns v. Beck, 83 Ga. 471, 495, 10 S. E. 121, where officers held liable for corporate debts to the extent of 448.

the corporation is insolvent.26 They may bind themselves, of course, by express agreement,27 if there is a consideration and the agreement is in writing, when necessary under the statute of frauds.28 And, as already shown, officers may become liable personally if they contract in their own name, without disclosing that they are contracting on behalf of the corporation only, or if they contract without authority, or for a corporation which has no legal existence, or in excess of the powers of the corporation, etc.29 Officers are not liable on a lease because of defects in executing it ìn behalf of the corporation where the lessor accepted the corporation as the contracting party and the officers acted as agents of a disclosed principal.30

§ 2587. Liability for failure to comply with statutory requirements or conditions precedent to right to do business. A mere failure of a corporation to comply with statutory requirements does not of itself make the officers individually liable, where the statute does not so provide.31 For instance, corporate officers are not liable for corporate debts to creditors because the capital stock was not fully subscribed,32 unless there is an express statute imposing liability in such a case, 33 or unless the law in the particular jurisdiction is that subscription to the capital stock is essential to the legal existence of a corporation.34 There is no common-law liability of

26 Martin v. Chambers, 214 Fed. 769. 27 See Georgia Railroad & Banking Co. v. Pendleton, 87 Ga. 751, 13 S. E. 822; Maine Red Granite Co. v. York, 89 Me. 54, 35 Atl. 1014; Jones v. Trimble, 3 Rawle (Pa.) 381.

See generally § 2521, supra.

28 See Youghiogheny Shaft Co. v. Evans, 72 Pa. St. 331.

A parol agreement by an officer of a corporation to advance money to pay its debts is not binding on him individually. First Nat. Bank of Burlington v. Owen, 52 Iowa 107, 2 N. W. 980.

29 See $2522 et seq., supra.

30 Schwartz v. Obstler, 144 N. Y. Supp. 20.

153 Pac. 1082; American Radiator Co. v. Kinnear, 56 Wash. 210, 35 L. R. A. (N. S.) 453, 105 Pac. 630. See also Barnard Mfg. Co. v. Ralston Milling Co., 71 Wash. 659, 129 Pac. 389.

There is no liability, independent of statute, on the part of the president of a corporation, merely because he permitted the corporation to commence business before all its stock was subscribed. McKay v. Garman, 89 Wash. 23, 153 Pac. 1082.

33 See 2625, infra.

34"In Walton v. Oliver, 49 Kan. 107, 30 Pac. 172, 33 Am. St. Rep. 355, and Wechselberg v. Flour City Bank, 64 Fed. 90, 12 C. C. A. 56, 26 L. R. A. 470, individual liability was upheld on the ground that there was no corporation to be bound." American Radiator Co. v. Kinnear, 56 Wash. 210, 35 L. R. A. (N. S.) 453, 105 Pac. 630.

31 Pierce & Galloway v. Yeaton, McDonald & Loring, N. H. 97 Atl.

876.

32 McKay v. Garman, 89 Wash. 23,