Opinion ID: 567522
Heading Depth: 1
Heading Rank: 1

Heading: Duty of the directors of NACC.

Text: 27 The district court instructed the jury that it could find the appellants liable for the loss of Viall's silver if it found the appellants negligently supervised the corporation and that such negligence was the proximate cause of Viall's loss. Appellants argue that a director or officer of a corporation cannot, as a matter of Arizona law, be found liable to nonshareholders for negligent management or supervision of the corporation. We review a district court's interpretation of state law de novo. Matter of McLinn, 739 F.2d 1395, 1397 (9th Cir.1984) (en banc). 28 Appellants cite several authorities that support the proposition that a director or officer is not liable for the torts of the corporation unless he authorized or participated in the wrongful actions. See, e.g., Maloof v. Raper Sales, Inc., 113 Ariz. 485, 557 P.2d 522, 525 (Sup.Ct.1976) (en banc), In re Arizona Bank's Estate, 42 Ariz. 62, 22 P.2d 409 (1930). Viall agrees that this is true for most types of corporate torts but argues that a different set of rules applies when the corporation is involved in the storage of property for third persons. In such cases, Viall argues, the directors are subject to a greater duty of care toward the corporation's clients. 29 Viall relies on Jabczenski v. Southern Pac. Memorial Hospitals, 119 Ariz. 15, 579 P.2d 53 (Ariz.App.1978). In Jabczenski, plaintiffs were employees of a nonprofit medical services corporation. The employees entered into deferred compensation agreements with the employer. Plaintiffs provided affidavits stating that the business manager in charge of organizing the agreements told employees that the specific monies deferred from affiant's periodic salary would be invested in life insurance annuity policies upon the life of affiant and for the affiant. 579 P.2d at 57. 30 When the employer corporation began having financial difficulties it entered into an agreement with Health Maintenance Foundation (HMF), a California nonprofit corporation. The employer transferred all its assets and liabilities and later assigned the annuity contracts to HMF. The president of HMF cashed the annuity contracts and some of the proceeds were deposited into certificates of deposit and some was spent on HMF expenses. The HMF board of directors, including defendant Dr. Upjohn, later ratified the expenditure. Id. at 56. Soon after, HMF filed a petition under Chapter 11 of the Bankruptcy Code. 31 The employees sued the employer and Dr. Upjohn for fraud, conversion, breach of contract, and conspiracy. The defendant's summary judgment motion was granted and the employees appealed claiming there was an issue of fact as to whether the deferred compensation funds were held in trust. Id. at 57. The Arizona appeals court reversed. 32 The court first determined that there remained a factual issue of whether a trust was created. If the monies were determined by the fact finder to be held in trust, the court stated, then their disposition by HMF would be a conversion of the trust property. The court then discussed the potential liability of a director of HMF. The court stated, 33 Corporate directors are not personally liable for conversion committed by the corporation or one of its officers merely by virtue of the office they hold. To be held liable, the directors must participate or have knowledge amounting to acquiescence or be guilty of negligence in the management and supervision of the corporate affairs causing or contributing to the injury.... A director who actually votes for the commission of a tort is personally liable, even though the wrongful act is performed in the name of the corporation. 34 Id. at 58. 35 Though a finding of negligence was arguably unnecessary to find that Dr. Upjohn could be liable as he ratified the improper expenditures, we believe Jabczenski expresses the law of Arizona on this question. Allowing the jury to consider the negligence of the appellants was not, on the facts of this case, erroneous. 36