230 F. 1005 | E.D.S.C. | 1916
The plaintiff, which will be referred to as the “Chemical Company,” is a New Jersey corporation- engaged in the manufacture and sale of commercial fertilizers. During the year 1910, and prior thereto, it maintained an agency in the state of South Carolina, for the purpose of making contracts for the sale of its manufactured products. The Rosemary Mercantile Company, which will be referred to as the “Mercantile Company,” was a corporation created and organized under and pursuant to the laws of South Carolina, with power to conduct a general mercantile business, buying and selling goods and merchandize, including commercial fertilizers. Defendants, other than W. D. Morgan and A-. C. Hinds, at the time of and prior to the transaction with plaintiff, were directors of the company. L. S. Ehrich was the president, and B. A. Brown secretary and treasurer.
On February 4, 1910, the Chemical Company entered into a contract in writing, signed by its duly authorized agent, with the Mercantile Company, signed “Rosemary Mercantile Company, by B. A. Brown.” The Chemical Company agreed to deliver to the Mercantile Company, at Georgetown, S. C., commercial fertilizers; a schedule of quantity, analysis, and price per ton, being incorporated in the body of the contract.
Among other things, it was provided that, until sold, or settled for, the fertilizers contracted for and delivered should remain the property of the Chemical Company, and, when sold, all proceeds of sales of such fertilizers, including cash, notes, open accounts and liens, and' all collections therefrom, should be kept separate and held for the use and benefit of the Chemical Company, and subject to its order. The Mercantile Company agreed to send, on or before May 1, 1910, to the Chemical Company a complete list of time sales, and indorse, if neces
On the 29th of August, 1910, the Chemical Company delivered to the Mercantile Company a number of notes, accounts, and chattel mortgages, amounting to $7,717.00, which represented sales on credit of fertilizers delivered to the Mercantile Company under the terms of the contract of February 4, 1910. These notes and accounts had been theretofore delivered to the Chemical Company. The Mercantile Company, “by B. A. Brown,” executed a receipt for the notes, to which a schedule was attached, showing names of debtors, securities, and amounts. By the terms of¡ the receipt, the Mercantile Company agreed “to hold same in trust for collection for the account of said company and will hold all collections of same as they are made for the use and benefit of said company and subject to its order as per terms of our contract, dated February 4, 1910.” The Mercantile Company collected from, and on account of, the notes, etc., so received by it, the sum of $5,188.80. Of the amount so collected, the Mercantile Company paid to the Chemical Company the sum of $826.89. The uncollected notes, etc., held by tire Mercantile Company, when it was adjudged bankrupt, were delivered, by Mr! Ehrich, president, to the Chemical Company. The Chemical Company collected from the accounts so delivered to it $85.50, leaving due the Chemical Company, on account of the collections, $4,276.41. The Mercantile Company became insolvent, and was adjudged bankrupt, March 11, 1911.
The master finds:
“That the president, B. S. Ehrich, and the treasurer, B. A. Brown, had actual knowledge of all transactions set forth in the bill of complaint, but that the other directors, defendants herein, did not have any actual knowledge of the contract and the collections made thereunder, other than such knowledge as they might have, generally, of the method of dealing on the part of the Rosemary Mercantile Company in the purchase of fertilizers.”
He further found that defendant J. B. Steele is one of the most prominent men in the financial circles of Georgetown, a director of numerous corporations, and a man of high standing in the community, president of the People’s Bank and of the Georgetown Grocery Company." The Mercantile Company had been in existence six or seven years. Defendant lived in Georgetown, about 16 miles from Rose-' mary, where the company carried on business. He had no knowledge of file transaction with the Chemical Company or the receipt of the notes, etc., nor of collections made therefrom.
Defendant W. H. Andrews had been, for many years, of the most prominent men-of .the county; identified with large interests and probably known to more people than any one else in that section; lived
Defendant R. M. Barnes was a director during the year 1910. It does not very clearly appear when he was elected. Attended two meetings, “not more than three,” in Georgetown. Knew nothing of the transaction with the Chemical Company until he was served with process in this case. Was not at all familiar with the management of the corporation. Manager of the Atlantic Coast Lumber Corporation; owned $1,000 stock in the Mercantile Company; paid money for it. “Simply bought the stock and paid no attention to the business. I had nothing to do- with the management of it. Don’t remember much about it.”
Neither of the directors received a salary. On the 14th of May, 1910, the Mercantile Company executed a mortgage conveying to the Georgetown Grocery Company its real estate for the purpose of securing the payment of an indebtedness of $3,000 and an advancement of $2,500. L. S. Ehrich was elected president in 1908, succeeding Mr. McCleary, deceased. B. A. Brown was employed as mánager. He was also secretary and treasurer. The business was conducted by him under the management and direction of the president. Mr. Ehr-ich says:
“The understanding was absolutely that no paper was valid unless signed by the secretary and countersigned by the president.”
This testimony was objected to by counsel for plaintiff “unless it was shown by the formal act of the board of directors to be his duty as secretary.”
Mr. Ehrich testified that he instructed Brown not to sign a contract with the Chemical Company; that he objected to his doing so. Ehrich was also a director and manager of the Georgetown Grocery Company, and that the Mercantile Company was largely indebted to the Grocery Company; that during the year 1910 the Grocery Company sold goods to the Mercantile Company on credit to a large amount. Mr. Ehrich says that some two months after he told Brown not to sign a contract, when Tucker, the agent of the Chemical Company, was in Georgetown and talked with him about the Georgetown Grocery Company, and then about the Rosemary Mercantile Company having turned over to him the securities; that he immediately took the matter up with Brown; he said that he had done it. Referring to a conversation had with Tucker, beiore the contract was signed, Mr. Ehrich says that he remembered on one occasion that Tucker asked him about making a contract with the Georgetown Grocery Company and about a contract with the Rosemary Mercantile Company.
“I told bim tbat I didn’t know what they wanted that year and that he had better see Brown. I don’t recollect any other interview with Tucker.”
Tucker says that during the month of February (1910) he saw Ehrich about selling the Georgetown Grocery Company, of which he
The case, as presented by the findings of the master, which is sustained by the evidence, comes to this:
The Mercantile Company, in the course of its regular business and within the powers conferred by its charter, through its manager, entered into a contract February 4, 1910, with the Chemical Company, for the purchase of commercial fertilizers during the season of that year. - By the terms of the contract the fertilizers delivered, until sold, and the proceeds, whether cash or accounts, notes, étc., and the securities taken therefor,” were and remained the property of the Chemical Company. At the end of the season, the accounts, notes, chattel mortgages, and other securities held by the Mercantile Company were delivered to the Chemical Company. In pursuance of the terms of the contract, the Chemical Company delivered these accounts, notes, etc., to the Mercantile Company; B. A. Brown signing the receipt therefor. He collected from these claims the sum found by the master and deposited such collections to the credit of the Mercantile Company in the People’s Bank of Georgetown, and, except the sum paid to the Chemical Company, found by the master, checked the amounts out for the benefit of the Mercantile Company. Neither of the defendants J. B. Steele, W. H. Andrews, nor R. M. Barnes, had any knowledge of the contract, the receipt of the notes, etc., and the collections made thereon.
It does not appear to be very material, except as explaining the transaction, whether Bi'own was authorized to sign the contract of February 4, 1910, because the obligations of that contract were, so far as these accounts are concerned, executed — discharged. The Mercantile Company ceased to have any duty, or obligation, to the Chemical Company, with respect to the accounts, until delivered. The Chemical Company had, by receiving them,'assumed the duty of collection and application of the proceeds to the discharge of the notes which it held against the Mercantile Company for the price of the fertilizer. At the time they were delivered to the Chemical Company,, no creditors had acquired any lien upon them. Hence, there was no reason why they should not have been delivered according to the terms of the contract. It was valid as between the parties, without registration. Whatever liability, therefore, was imposed upon the Mercantile Company, must be found in the receipt of them, on August 29, 1910. It is to the breach of duty assumed by Brown for the Mercantile Company, at that time, that the Chemical Company must resort to fix liability upon the Mercantile Company. It is true that,, by the terms of the contract, the Mercantile Company agreed to “surrender” to the Chemical Company the notes, etc., “which are to be returned” by the company “for the purpose only of collection and remittance, * * * and when so returned are to be receipted for in trust to the company.” These several stipulations were complied with. It is doubtful whether, disassociated from the contract of February 4, 1910, the receipt by Brown, as secretary and manager of the Mercantile Company of the notes and accounts, was within the scope of his power, and imposed upon the corporation any liability, unless it received the amount collected from them. If he had appropriated the proceeds to his own use, it is not clear that the Mercantile Company would have been liable. As he deposited the proceeds to the credit of the Mercantile Company, they could have been reached, while so held, or, if used, the Mercantile Company would have been liable to an action for money had and received or, in equity, for an. accounting.
This suit is properly brought in equity. Assuming that a liability to execute the trust was imposed by the receipt of the notes and accounts, upon the corporation, and that the Chemical Company would be entitled to a decree against it, directing the payment of the amount collected and not paid over for a breach of trust, the question presented is whether, upon the facts found by the master, the defendants, directors, are personally liable therefor. The foundation of the alleged liability sought to be imposed upon the directors is analogous to that stated by Mr. Chief Justice Fuller in Briggs v. Spaulding, 141 U. S. 132, 145, 11 Sup. Ct. 924, 928 [35 L. Ed. 662], wherein he says:
“It is not contended that the defendants knowingly violated, or permitted the violation of, any of the provisions of the Banking Act, or that they were guilty of any dishonesty in administering the affairs of the bank; but it is charged that they did not diligently perform duties devolved upon them by the act.”
That was a suit in equity by the receiver of an insolvent national bank against the directors, in which it was sought to fix them with personal liability, for negligently failing to discharge their duties, resulting in violations, by the cashier, of the provisions of the act and wasting of the assets of the bank. The court discusses their liability,
“Bank directors are often styled trustees, but not in any technical sense. •The relation between them and the corporation is rather that of principal and agent, certainly so far as creditors are concerned, between whom and the corporation the relation is that of contract and not of trust. But, undoubtedly, under circumstances, they may be treated as occupying the position of trustees to cestui que trust.”
In a recent work, in which the decided cases are reviewed, it is said:
“In discussing, and determining, the liability of officers and other agents of corporations, for negligence, the judges have employed language which is often irreconcilable and formulated rules which, however; well understood in the abstract, have been difficult of application, and have led to conflicting judgments upon facts substantially identical.” 7 Ruling Case Law, 491.
The increase in the number and variety, in respect to the character of business in which they engage, of private corporations, have imposed upon the courts the duty of finding a legal basis for fixing the relationship between the corporation, stockholders, and creditors, and its directors. That the court was impressed with the necessity of careful consideration, and the use of well-considered language in Briggs v. Spaulding, supra, is manifest from a careful examination of the opinion written by the' Chief Justice. Corporations conduct their operations only through the medium of agents, and these agents must be selected either by the stockholder^, directors, or the president, or other managing officers. In the selection of these officers or agents, as in all other matters, the board of directors must act jointly, and as a board; hence it is difficult to fix personal, individual, responsibility for mistakes of judgments, or negligence. After an examination of, and making quotations from, the best considered decisions, the Chief Justice reaches the conclusion that:
“The degree of care to which these defendants were bound is that which ordinarily prudent and diligent men would exercise under similar circum*1014 stances, and In determining that the restrictions of the statute and usages of business should be taken into account. What may be negligence in one case may not be want of ordinary care in another, and the question of negligence is therefore ultimately a question of fact, to be determined under all the circumstances.”
*1015 “The business of tlie bank had been conducted for years by the president, assisted by the other executive officers, and it had seemingly been well conducted. * * s: Nor was there any violation of law in permitting him to conduct its business, for he was duly authorized to do so under the provisions of the act. We do not mean that this dispensed with reasonable oversight by the directors, but that belongs to a different branch of the enquiry.”
To the suggestion that the defendants should have insisted on meetings of the board of directors, or had special meetings called, or otherwise made personal inspection of the affairs of the bank, and, if they had done so, they would have discovered the condition of the bank and prevented losses occurring subsequently, it is said:
“Here, again, it should be observed that even trustees are not liable for the wrongful acts of their cotrustees, unless they connive at them, or aro guilty of negligence conducive to their commission.”
In that case, there were large transactions in gross violations of express prohibitions of the Banking Act, which it was conceded would liave been disclosed by a thorough examination of the books. As to these defaults, it was said that:
“It could not be laid down as a rule that there is an unavoidable presumption of rascality of one’s agents in business transactions, and that the degree of watchfulness must he proportioned to that presumption.”
The language used by the Vice Chancellor in Scott v. DePeyster, 1 Edw. Ch. 513, and in Wakeman v. Dalley, 51 N. Y. 27, 10 Am. Rep. 551, is quoted with approval. From the opinion in Hallmark’s Case, 9 Ch. D. 329, the following language is quoted:
“It is contended that Hallmark, being a director, must be taken to have known the contents of all the books and documents of the company, and so to have known that his name was on the register of shares for 50 shares. But he swears that in fact he did not know that any shares had been allotted to him. Is knowledge to bo imputed to him under any rule of law? As a matter of fact, no one can suppose that a director of a company knows everything which is entered on the books, and I see no reason why knowledge should be imputed to him which he does not possess in fact.”
The Chief Justice says:
“We are of the opinion that these defendants should not be subjected to liability upon tbe ground of want of ordinary care, because they did not compel the board of directors to make such an investigation and did not themselves individually conduct an examination during their short period of service, or because they did not happen to go among the clerks and look through the books, or call for and run over the hills receivable.”
This, and many of the other cases, found in the reports, involved the duty of directors of banks. Marshall v. Farmers’ & Mechanics’ Savings Bank, 85 Va. 676, 8 S. F. 586, 2 H. R. A. 534, 17 Am. St. Rep. 84. See, also, 7 Ruling Case Law, § 454, and cases cited.
No higher degree of care should be imposed upon directors of mercantile corporations. The right of the Chemical Company to hold the directors to personal liability in this case is dependent upon showing negligence in respect to the specific transaction, and that such negligence was the proximate cause of the wrongful conduct of the secretary and treasurer.
A decree will be drawn dismissing the bill as to all of the defendants except L. S. Ehrich and B. A. Brown. The exceptions as to them are overruled; a decree will be signed, as to them, in accordance with the conclusions of the master.