Opinion
Decided August 6, 1928.
Corporations — Personal liability of directors — Loss or waste of corporate funds or property — Acting clearly beyond powers resulting in loss — Nonliability for errors in judgment — Knowledge of corporate affairs or contents of books, not imputed — Actionable negligence defined and liability therefor — Insufficient evidence of actionable negligence creating personal liability.
1. Actionable "negligence" is failure of duty, omission of something which ought to have been done, or doing of something which ought not to have been done, or which reasonable man, guided by considerations which ordinarily regulate conduct of human affairs, would or would not do.
2. In order to be actionable, negligence must result in injury, loss, detriment, or mischief to another.
3. Directors of corporation are bound to care for corporate property, and conduct and manage its affairs in good faith, and for violation of these duties, resulting in waste or loss of assets, they are liable, and must account therefor in same manner as other trustees.
4. If directors of corporation act clearly beyond their power, thus resulting in loss to corporation, they are personally liable therefor.
5. Directors of corporation are liable, if they suffer funds of corporation or its property to be lost or wasted by gross negligence and inattention to duties of their trust.
6. Where reasonable care, diligence, and good faith have been exercised by directors of corporation, they are not liable for losses resulting to corporation from mere errors of judgment on their part.
7. Directors of corporation are not bound as matter of law to know all its affairs, or all transactions or business conducted by corporation, or at all times to know just what its books and papers contain, and such knowledge cannot be imputed to them for purpose of charging them with liability therefor.
8. Where evidence did not disclose confidential or friendly relationship between certain corporation directors and its president or any one else with reference to any of business transactions of company as would indicate that directors had knowledge of improper or illegal transactions of company or of its officers as would show guilty knowledge on their part, actionable negligence on part of directors in management of corporate affairs, creating liability for resulting loss to stockholders, was not shown.
APPEAL: Court of Appeals for Cuyahoga county.
Mr. Walter C. Rhorbacker, Mr. George E. Schroth, Mr. W.C. Shepherd and Mr. John Andrews, for appellants.
Messrs. Vickery Vickery, Mr. W.K. Gardner, Mr. James McSweeney and Mr. Howard Burns, for appellees.
This is an appeal case, and comes into this court from the common pleas court of Cuyahoga county.
The amount of money sought to be recovered in this action is about $8,000,000, and the action grows out of the defalcations of the late Cleveland Discount Company.
The plaintiffs, Hattle L. Goff and others, on behalf of themselves and other stockholders of said company, seek to recover for the benefit of the company against the seventeen defendants, Fred C. Emde and others, who were its directors at the time it ceased to function, based on the claimed negligent acts on the part of said directors in the conduct and management of the corporate affairs and business transactions of the said the Cleveland Discount Company.
It was stated, and agreed to in this court on the trial, by counsel on both sides, that the only parties in interest here in the issues to be determined by this court are the plaintiffs, and the defendants William H. Hopple, the estate of Allen Andrews, and the receivers of the Cleveland Discount Company, predicated on the pleadings filed by them and the evidence offered thereon.
This lawsuit is outstanding because of the large amount of money involved and the claimed negligent acts of omission and commission on the part of William H. Hopple and Allen Andrews, as directors of the Cleveland Discount Company, which claimed conduct on their part, if sustained by the evidence, makes them liable in the premises to respond to plaintiffs in a large money judgment.
The plaintiffs in their petition, as grounds for a recovery against the defendants, aver, in substance, that as directors collectively, and each as an individual, during their services as directors, and while assuming to act in that capacity for the company, they "had supervision, care, custody, and control of the property and assets, and were engaged in and conducting the business of the company, and as such directors were guilty of such acts and conduct on their part collectively and individually, as to constitute gross negligence; that they were unfaithful and grossly negligent to the duties imposed upon and required of them; and each of them, as such director, by the laws of the state under which the company was chartered, as well as by the laws of the state of Ohio, by reason thereof, was and is guilty in fact and law of such conduct with reference to certain specific acts done and things omitted to be done, as fully set forth in the petition, as to constitute actionable negligence on the part of the said directors, for which a recovery in money should be had and is prayed for."
Question: Have they done so under the evidence offered, when measured by the law governing same?
The sole and only question here is one of fact. In other words, under the record evidence, are the defendants Hopple and Andrews, or either of them, guilty of actionable negligence?
Actionable negligence is a failure of duty, the omission of something which ought to have been done, or the doing of something which ought not to have been done; or it may be stated as the omission to do something which a reasonable man, guided by those considerations which ordinarily regulate the conduct of human affairs, would do, or the doing of something which a provident and reasonable man would not do. And, in order to be actionable, the claimed negligence must result in injury, loss, detriment, or mischief to another.
The duties of directors of a corporation seem to be well settled in this as well as other jurisdictions. They are bound to care for the corporate property, and conduct and manage its affairs in good faith, and for a violation of these duties, resulting in waste or loss of its assets, they are liable, and must account for the same in the same manner as other trustees. If they act clearly beyond their power, thus resulting in loss to the corporation, they are personally liable.
Directors are also liable if they suffer the funds of the corporation or its property to be lost or wasted by gross negligence and inattention to the duties of their trust.
"It is well settled that, where reasonable care and diligence and good faith have been exercised, the directors are not liable for losses resulting to the corporation from mere errors of judgment on their part." 7 Ruling Case Law, 476; 2 Cooley on Torts (3d Ed.), 985.
"The duties of active officers of a corporation who devote all or the greater portion of their time to the business of the corporation, and who receive a salary as such officers, are more extensive than those of a director who does not give a corporation his daily attendance and who receives either no compensation or a more or less nominal sum for attending directors' meetings." 4 Fletcher on Corporations, Section 2406.
"It is too well settled to admit of controversy that ordinarily neither the directors nor the other officers of a corporation are liable for mere mistake or errors of judgment, either of law or fact, i.e., for mistakes which may properly be classified under the head of honest mistakes. Bad judgment without bad faith does not ordinarily make officers individually liable. * * * As stated by Mr. Morawetz: `Directors merely undertake to make honest use of such judgment as they possess. They do not insure the correctness of their judgment; and they can not be charged with the consequences of an honest error of judgment or accidental mistake in the exercise of their discretionary powers'." 4 Fletcher on Corporations, Section 2452. Also 7 Ruling Case Law, 476, 477.
It will be conceded that directors of corporations occupy a responsible and important business relation to the general public; and, in accepting such position of trust and responsibility, it is not only presumed, but expected of them, that they will deal with the corporate property and conduct the business of the corporation with prudence and good faith. They have assumed the duty to properly, intelligently, and honestly conduct all the corporate affairs in such a way and manner as will be for the best interests of the stockholders and all concerned. However this may be, yet the directors are not held as a matter of law to know all its affairs, or all the transactions or business conducted by the corporation, or at all times to know just what its books and papers contain; and it is well settled that such knowledge cannot be imputed to them for the purpose of charging them with liability.
The rule in Ohio, as well as in most jurisdictions, appears to be as laid down in 2 Thompson on Corporations (3d Ed.), Section 1520, which reads: "The degree of care to be exercised by the officers of a corporation in the performance of their duties is that which ordinarily prudent men would exercise under similar circumstances in like employments having regard to the uses of business and the circumstances of each case. In general they are not liable in the absence of fraud or intentional breach of trust for negligence or mistakes of judgment, and where they have not profited personally by their bad management or appropriated any of the property of the corporation to their own use, courts of equity treat them with indulgence."
It is not claimed by plaintiffs that directors Hopple and Andrews appropriated any of the assets or property of the company to their own use, or in any way profited personally from any transaction with the corporation. Yet it was stated in oral argument, and its truthfulness is not disputed, that Hopple had lost $200,000 and Andrews $25,000 in investments made with the company. This certainly is an outward sign of an inward feeling that they had confidence and faith in the company and of its soundness financially, at least at the time the investments were made, and up to or about the time the receivers were appointed.
It must be remembered that Hopple and Andrews are not charged with any fraudulent acts done or omitted to be done, or of any wanton or intentional wrongdoing, and, in fact, there is no evidence even tending to establish same.
The claimed mischief lies in the fact that they should have known, or with proper care and attention given to the company would have known, of its improper conduct on the part of the president and certain other officers of the corporation.
Under the evidence before us, it is clear that the "guiding star" of the Cleveland Discount Company was Josiah Kirby, its president, and, under the corporation charter and the rules and regulations of the company, Josiah Kirby, the president, was in full and complete command.
It does not require a very careful reading of the evidence to determine that under these wide powers given Mr. Kirby he was from the beginning to the end the dominant factor and autocratic leader of the business done and policies carried out by the Cleveland Discount Company until the "crash" came, and the story of "Kirby's Frenzied Financial Career" became history.
But the evidence does not disclose such confidential or friendly relationship between Hopple and Andrews on the one part and Kirby or any one else on the other part with reference to any of the business transactions of the company as would in any way or manner indicate that Hopple and Andrews, or either of them, had knowledge either directly or indirectly of any improper or illegal transactions of the company or of any of its officers such as would show guilty knowledge on their part, or that they, Hopple or Andrews, or either of them, possessed knowledge through which they ought to have known, or through which a reasonably prudent business person would have known, under like circumstances.
As to the law governing this case, we are convinced that the decision and the authorities cited in the case of Mason v. Moore, 73 Ohio St. 275, 76 N.E. 932, 4 L.R.A. (N.S.), 597, 4 Ann. Cas., 240, are clearly applicable to the proven facts before us. This, together with the other authorities cited, and the rules of law herein laid down, lead us to the unanimous conclusion that there is a failure of proof on the part of plaintiffs to establish the material allegations of the petition as against the defendants Hopple and Andrews, or either of them, and plaintiffs' petition is dismissed as to them.
Judgment for the defendants William H. Hopple and Belle D. Andrews, executrix of the estate of Allen Andrews, deceased.
Decree accordingly.
LEMERT and LLOYD, JJ., concur.
HOUCK and LEMERT, JJ., of the Fifth Appellate District, and LLOYD, J., of the Sixth Appellate District, sitting in place of SULLIVAN, VICKERY and LEVINE, JJ., of the Eighth Appellate District.