Opinion ID: 512405
Heading Depth: 3
Heading Rank: 1

Heading: The Duty Owed by the Directors and Officers to the Corporation

Text: 16 Under Louisiana case law, it is well-settled that [t]he corporation itself and, in proper cases, the stockholders have a right of action against the agents of the corporation for gross negligence, maladministration of the corporate affairs, and omissions of official duty.... Allen v. Cochran, 160 La. 425, 107 So. 292, 293 (1926). 5 The standard of care expected of corporate officers and directors has been expressed as follows: 17 Directors are not liable for mere errors of judgment on their part where they act in good faith. They are only required to exercise reasonable care and diligence and act in good faith. But they are liable for wilful neglect of duty, gross negligence or their fraudulent breach of trust. 18 Pool v. Pool, 16 So.2d 132, 135 (La.Ct.App.1943). Corporate officers and directors, therefore, are liable to the corporation for gross negligence in the discharge of their duties. Allen, 107 So. at 293; Pool, 16 So.2d at 135; see also Bacher v. Albert, 180 La. 108, 156 So. 191 (1934); Reliance Homestead Ass'n v. Nelson, 179 La. 680, 154 So. 734, 736 (1934) (it is a well recognized rule, by both the federal and state courts, that an executive officer of a corporation cannot be held liable for errors of judgment, where he acts with reasonable care, without corrupt intent, and in good faith); Stock v. E.A. Fabacher, Inc., 185 So. 48, 49 (La.Ct.App.1938) (officers and directors of a corporation are answerable only to the company for their acts of gross negligence or their maladministration of corporate affairs). Cf. Edwins v. Lilly, 422 So.2d 1217, 1222 (La.Ct.App.1982), writ ref'd, 426 So.2d 178 (La.1983) (applying the Louisiana statute concerning the standard of care exacted of corporate officers and directors to a liquidator of an insolvent corporation and concluding that liability may arise from neglect of duty). See generally Comment, Duty of Corporate Officers and Directors In Louisiana, 29 La.L.Rev. 691, 692-98 (1969). The appellees' proposition to the contrary is in error. 19 The appellees, relying on Farwell v. Milliken & Farwell, Inc., 145 So.2d 644 (La.Ct.App.1962), argue that LWE cannot maintain an action against its officers and directors for gross negligence, mismanagement or breach of fiduciary duty absent allegations of fraud. In Farwell, the court was faced with a suit by a disgruntled minority stockholder who sought to force the appointment of a receiver for a patently solvent corporation. Relying on Peiser v. Grand Isle, Inc., 221 La. 585, 60 So.2d 1 (1952), the court noted that in the absence of a clear showing of fraud or breach of trust the courts are slow to interfere, will order the appointment of a receiver only when it is manifest that it should be made.... Farwell, 145 So.2d at 647 (quoting Peiser, 60 So.2d at 3). Guided by the Louisiana statute governing the fiduciary duty owed a corporation by its officers and directors, the court wrote that: 20 Under these standards breach of trust would include actions prompted by fraudulent design done in utter bad faith and would not embrace within its meaning acts of negligence, ignorance or mistake. This standard of conduct requires the design of legal fraud as applied to contracts. In the absence of allegations of fact manifesting fraudulent intent and utter bad faith there can be no breach of trust. 21 Farwell, 145 So.2d at 649. From this passage, the appellees derive their Farwell standard of officer and director liability--a standard which requires a level of proof amounting to legal fraud. Our review of Louisiana law reveals that the true standard requires only a showing of gross negligence. 22 First, we note that Farwell is readily distinguishable from the instant case. Farwell merely outlined the level of proof required to demonstrate a breach of trust sufficient to justify appointing a receiver for a healthy corporation--an action calculated to affect injuriously [the corporation's] business and affairs.... Reynaud v. Uncle Sam Planting & Mfg. Co., 152 La. 811, 94 So. 405, 408 (1922). Farwell did not presume to promulgate or identify a general rule of Louisiana corporate jurisprudence governing actions by corporations against their agents for gross negligence, mismanagement or breach of fiduciary duty. 23 Second, we note that even if Farwell could be construed in the manner that appellees posit, we would be constrained from adopting its reasoning for to do so would be to ignore express pronouncements by the Louisiana Supreme Court and to rule contrary to the weight of Louisiana precedent. See e.g. Allen, 107 So. at 293; Pool, 16 So.2d at 135. 24 Finally, we note that the appellees' position is at odds with the clear language of the Louisiana statutes governing the obligations of corporate officers and directors. See La.Rev.Stat.Ann. Secs. 12:91, 12:226(A) (West 1969). If an officer or director of a corporation is shielded from liability to the corporation absent a showing of bad faith or fraud, then the statutory language requiring that the officers and directors discharge the duties of their respective positions in good faith, and with that diligence, care, judgment and skill which ordinarily prudent men would exercise under similar circumstances in like positions would be rendered nugatory. Under the appellees' formulation, an officer or director could fulfill his obligations to the corporation by acting with no diligence or skill whatsoever so long as he did not act in bad faith or with fraudulent intent. Under the circumstances, we must reject the appellees' proposition that LWE cannot maintain an action against LWE's officers and directors for gross negligence, 6 mismanagement and breach of fiduciary duty. 25