#### M. L. BRASWELL, Receiver of the Perpetual Building and Loan Association, v. R. A. MORROW et al.

(Filed 31 January, 1928.)

1. Negligence — Actions—Rights of Actions — Corporations — Officers — Duties and Liabilities.

Where the directors of a building and loan association are negligent of their duties and leave the management of its affairs in the hands of its secretary-treasurer, who, by maturing the stock at an earlier date than was safe, caused the association to become insolvent and finally to be placed in the hands of a receiver, and by other acts of mismanagement tending to the same result, and the directors by the observance of their duties should- have been aware of the conditions existing: *Held,*a cause of action arises to the receiver upon a joint tort, in behalf of the stockholders and creditors of the corporation.

2. Torts — Joint Tort-Feasors — Liabilities—Release.

Joint *tort-feasors*cannot relieve one of their number from liability on a joint tort by executing a release to him.

3. Same — Receivers.

A release of one joint *tort-feasor*by the receiver of a corporation that has caused loss by the tortious act, in full settlement of all claims of whatsoever nature and kind that the corporation has against him (or his estate) is sufficiently comprehensive to include not only the personal liability of the one released, but of them all guilty of the joint tortious act, and when founded upon a sufficient consideration will so operate. The difference between a release and a covenant not to sue distinguished by Brosden, J.

Civil aotioN, before *Oglesby, J.,*at August Term, 1927, of UnioN.

Tbe plaintiff was duly appointed receiver of tbe Perpetual Building and Loan Association in August, 1923. Tbe defendants,. Morrow, Lee and Houston, were tbe directors of said building and loan association. *128S. 0. Blair was a, director and died before tbe suit was brought, and bis administrators are also defendants.

Tbe plaintiff alleged tbat tbe Perpetual Building and Loan Association bad for many years been engaged in tbe business of a building and loan association under tbe provision of tbe laws of North Carolina. B. C. Ashcraft was a director of tbe association at tbe time of bis death, which occurred about 11 November, 1921. For many years prior to bis death Mr. Ashcraft bad been secretary and treasurer of tbe association. Paragraph four of tbe complaint is as follows: “Tbat tbe defendants, as hereinbefore set out, entrusted and turned over tbe entire management of tbe association to B. C. Ashcraft, whom they elected and annually reelected as secretary and treasurer of said association, and although they bad, or by tbe exercise of ordinary care and prudence could have at any time bad, information by tbe most superficial examination into tbe affairs of tbe association tbat tbe said secretary and treasurer was persistently pursuing a policy in the maturing of tbe stock of tbe association tbat would inevitably result in its insolvency, took no action to remedy tbe situation, but permitted tbe said secretary to continue *the*maturing of stock before it bad reached maturity until tbe assets of tbe corporation were so depleted tbat its stock was valueless, and a receivership to wind up its affairs necessary.”

Paragraph five of tbe complaint is as follows: “Tbat tbe defendants knew, or by tbe exercise of ordinary care and prudence in tbe performance of their duties as directors should have known, tbat tbe secretary and treasurer was maturing tbe stock of tbe association before it reached par, that is, paying out one hundred dollars on each share of stock at tbe end of a period of time insufficient for it to have reached said value by tbe payment of the weekly dues of tbe stockholder, and although this action on tbe part of tbe secretary and treasurer was repeatedly called to tbe attention of tbe defendants in tbe annual audits of tbe affairs of tbe association by tbe auditors and accountants employed to perform such service, the defendants by this gross neglect of their duties and other acts of negligence and inattention to tbe affairs of tbe association, as will be hereinafter set out, permitted tbe association to become insolvent and tbe stockholders and creditors thereof to suffer loss and sustain damages as will be hereinafter more fully alleged.”

Subsequent allegations of the complaint allege tbat tbe defendants as directors of said association failed to bold or attend meetings as required by law and tbe by-laws, “but permitted the entire business of tbe association to be managed, controlled and supervised by tbe secretary and treasurer, without any restraint or direction whatever from tbe directors.” It was further alleged tbat tbe defendants as directors failed to require tbe treasurer to give a bond or to annually examine bis books or to require him to keep a proper set of books, and tbat said de*129fendants negligently and carelessly permitted tbe secretary and treasurer to make loans on inadequate security and to fail to collect accrued interest upon loans made by tbe association.

It further appears from tbe récord tbat on 12 December, 1923, tbe plaintiff, receiver, instituted an action against Scott-Obarnley & Co., alleging in substance tbat tbe said Scott-Cbarnley & Go. were employed by tbe building and loan association to audit its books from time to time, and tbat said auditors carelessly and negligently failed to make a proper audit or to submit an accurate report of tbe condition of tbe association, and tbat “tbe officers and directors of said association, having no special training in work of tbis character, relied upon tbe correctness of tbe several reports made to tbem of tbe books by tbe defendant, as they bad a right to do.” In tbe complaint tbe plaintiff asked for $13,000 damage against Scott-Cbarnley & Co., which was tbe amount of tbe loss sustained by tbe association.

After tbe suit against tbe present defendants was instituted tbe plaintiff, as receiver, settled with S’cott-Charnley & Co. for tbe sum of $1,043.

On 14 March, 1924, tbe plaintiff, as receiver of tbe Perpetual Building and Loan Association, brought a suit against Mary B. Ashcraft as administratrix of B. C. Ashcraft. No complaint was ever filed in tbis suit, but on 21 May, 1924, Mary B. Ashcraft, administratrix of B. C. Ashcraft, paid to tbe plaintiff as receiver tbe sum of $1,250, and took from him a release as follows: “Received from Mary Blair Ashcraft, administratrix of B. C. Ashcraft, deceased, tbe full and just sum of $1,250 in full settlement of all claims of whatsoever nature and kind tbat tbe Perpetual Building and Loan Association has against tbe said estate, and we hereby consent tbat said administratrix may be forever discharged, and furthermore agree to take a nonsuit in tbe action instituted against said estate. Tbis 21 May, 1924. Perpetual Building and Loan Association. By M. L. Braswell, Receiver. By Yann & Milliken, Attorneys.”

Tbe receiver was examined as a witness. He testified tbat be presented a claim against tbe estate of Mr. Ashcraft, composed of various clerical errors made by him as secretary and for payment of installments that were entered on passbooks, but not recorded in tbe secretary’s office. He further testified tbat tbe whole claim was denied by tbe Ashcraft estate. On cross-examination tbe receiver said: “I did not say tbat it was tbe same thing tbat I am now trying to collect out of these defendants. It may be a part of tbe same thing. I executed tbe receipt and release to tbe estate of B. C. Ashcraft.”

Issues of negligence as to each director were submitted to tbe jury. These issues were answered against all tbe defendants except D. A. Houston, and damages were assessed at $6,000. Tbe defendants tendered appropriate issues as to whether tbe release by tbe plaintiff of tbe *130estate of Ashcraft and the settlement with Scott-Charnley & Co. operated as a release and discharge of the present defendants. The court refused to tender said issues and the defendants excepted.

*Vann & Millilcen for plaintiff.*

*John C. Sikes for defendants.*

BeogdbN, J.

The determinative question of law is this: Does a formal release of one director of a building and loan association, who was also secretary-treasurer and general manager thereof, discharge the other directors from liability for failure to perform their official duties ? The law is: “Directors and managing officers of a corporation are deemed by the law to be trustees, or gmwi-trustees, in respect to the performance of their official duties incident to corporate management, and are therefore liable for either wilful or negligent failure to perform their official duties. Therefore, if there is a loss of the corporation’s assets, caused and brought about by the negligent failure of its officers to perform their duties, the corporation, or its receiver, in case of insolvency, can maintain an action therefor.” “However, the officers of a corporation are not, as a rule, responsible for mere errors of judgment, nor for slight omissions from which the loss complained of could not have reasonably resulted.” *S. v. Trust Co.,*192 N. C., 246; *Besseliew v. Brown,*177 N. C., 65.

A careful perusal of the complaint in this cause will disclose that the loss sustained by the corporation resulted from two primary causes: (a) The negligent failure of Ashcraft, the secretary and treasurer, and a director of the corporation, to properly perform his official duties, in that he was placed in sole and exclusive control of the management of the corporation, and carelessly and negligently failed to keep proper records or to make a proper accounting, and particularly that he carelessly and negligently matured the stock of the corporation which ultimately produced insolvency, (b) That the directors carelessly and negligently failed to supervise or restrain the said secretary and treasurer or to require the proper performance of his official duties.

It is apparent from the complaint that both Ashcraft and the other directors failed to perform positive duties imposed by law. Therefore, they cooperated in bringing about insolvency. Hence they are joint *tort-feasors.*This was the status of the parties when the plaintiff, receiver, brought a suit against the estate of Ashcraft, and this was also the status of the parties when the plaintiff executed and delivered for a valuable consideration the release of the estate of Ashcraft. The release states that the money is received “in full settlement of all claims of whatsoever nature and kind that the Perpetual Building and Loan Asso*131ciation bas against tbe said estate.” Tbis language is comprehensive and inclusive. Tbe plaintiff insists tbat tbe release covered only items due by Asbcraft to the corporation as secretary and treasurer, arising from errors made by bim and collections which be bad not turned over to the corporation, but the paper-writing, upon its face, purports to cover .“all claims of whatsoever nature and kind.” This language not only includes amounts collected by Asbcraft and not accounted for, but also his liability as a director for negligent failure to perform bis official duties. This Court has declared in *Howard v. Plumbing Co.,*154 N. C., 224, tbat: “It is well settled that a release of one or more joint *tort-feasors*executed in satisfaction for an injury is a discharge of them all, on the ground that the party can have but one satisfaction for bis injury.” *Brown v. Louisburg*126 N. C., 701; *Burns v. Womble,*131 N. C., 173; *Smith v. R. R.,*151 N. C., 479; *Gregg v. Wilmington,*155 N. C., 23; *Sircey v. Rees’ Sons,*155 N. C., 296. The legal effect of a formal release is quite different from a covenant not to sue. A covenant not to sue one joint *tort-feasor*or one coobligor does not have tbe effect of releasing other *tort-feasors*or coobligors. *Sandlin v. Ward,*94 N. C., 496; *Mason v. Stephens,*168 N. C., 370. Therefore, when tbe plaintiff, as receiver, released Asbcraft for a valuable consideration, tbis release, under tbe law, inures to tbe benefit of tbe other directors, and tbe plaintiff is not entitled to recover.

The plaintiff contends, however, that the suit brought by him against the estate of Ashcraft was intended to charge Ashcraft as secretary and treasurer in failing to account for money which be bad received and failed to pay into the treasury. As no complaint was filed, this fact does not appear from the record; but, conceding that the plaintiff intended the suit against Ashcraft to cover such items alone, the fact remains that the release given contains language which covers all liability, whether arising upon contract or tort. Tbe plaintiff relies upon *Besseliew v. Brown,*177 N. C., p. 65. Tbis case involved the mismanagement of a building and loan association. It appeared that the secretary, who bad been entrusted with complete charge and management of the company, bad embezzled over $12,000 of the assets, thus causing insolvency. The directors bad accepted a mortgage for $6,000 of the shortage and thereafter canceled this mortgage upon receipt of the sum of $3,000. No question of a formal release was involved in the ease. Indeed, *Holce, J.,*in referring to accepting $3,000 in payment of a mortgage debt of $6,000, said: “Tbis may have been a mere error of judgment on their part, or it may have been the best course to take under the circumstances presented, but we fail to see bow it could inure to the protection of defendants, except in reduction of the damages, if any, that may be shown against them, and this effect is allowed *132it in the complaint.” It also appears in the *Brown case,*supra, that the directors themselves settled with Hammond, the defaulting secretary. Certainly, joint *tort-feasors*cannot relieve themselves from liability by making a settlement with or releasing one of their own number. In the present case the release was executed by the receiver, who was an officer of the court and charged with the duty of protecting the interests of stockholders and creditors. The case of *Slade v. Sherrod,*175 N. C., 346, relied upon by the plaintiff, is not applicable for the reason that there were two separate and distinct causes of action involved, and the release, upon its face,-purported to settle only one of said causes of action, leaving the other to be determined according to law.

Upon the whole record, and after a careful consideration of the merits of the appeal, we are of the opinion that the plaintiff is not entitled to recover.

Reversed.