Court Opinion

ID: 6904176
Source: CourtListenerOpinion
Date Created: 2022-07-23 21:58:06.444769+00
Date Added: 2024-06-11T16:06:16.890903
License: Public Domain

Opinion by
Mr. Chief Justice McBride.
1. We consider the law to be settled in this state that a deposit of wheat upon the conditions indicated in the warehouse receipt quoted constitutes a bailment and not a sale. The subject is so ably and thoroughly considered by Mr. Chief Justice Bean in the case of Savage v. Salem Mills Co., 48 Or. 1. (85 Pac. 69,10 Ann. Cas. 1065), that further discussion is unnecessary Being a bailment, it follows necessarily that the use of the wheat by the defendant corporation was an unlawful conversion thereof to its own use, for which an action will lie against it.
2. The difficult proposition in the case relates to the individual responsibility of the directors. It may be stated as a rule of universal application that a director of a corporation is not liable for any tort of other *358subordinate agents in which he did not participate. A recent writer succinctly states the law in the following language:
“This principle of agency leads inevitably to the conclusion that directors are not liable on contracts made by them on the company’s behalf, if their directorship is disclosed to the contractor. To be sure, if the contract is beyond the scope of their authority, or ultra vires of the corporation, or for some other reason not binding on the company, they may, like other agents, be liable on an implied warranty of authority. But if all the facts are known to the opposite party to the contract, the directors incur no liability to him because the contract is in law ultra vires of the corporation, and therefore not binding upon it. Moreover, if the contract is ratified, or, being ultra vires of the corporation, is so far executed as to become binding on the company, no liability to the third person is incurred by the directors or officers who entered into the contract. # * Directors are not liable to creditors of the company, or to any persons to whom the corporation owes a duty, whether arising out of contract or otherwise, for having failed to see to it that the duty is performed. For example, they are not liable personally to a shareholder whose dividends they wrongfully withheld. Even an express oral promise by directors to pay a debt of the corporation may be unenforceable under the statute of frauds. * * On the other hand, although directors are not liable for negligent torts of subordinate agents in which they have not participated, they are clearly liable ex delicto for any tort in which they participate. Hence they will be liable to stockholders or creditors who have relied to their hurt upon false reports or prospectuses which the directors have published, fraudulently or (in any jurisdiction where negligent misrepresentation is actionable) negligently; and so an officer of a corporation, who issues on its behalf bonds containing a representation known by him to be false, will be liable to an action of deceit by any purchaser who relies thereon. So, if directors, by regis*359tering a transfer of shares which they know to be held in trust, prejudice the interest of the cestui que trust, they are liable ex delicto for assisting a trustee to commit a breach of trust; and this liability, it seems, attaches to the directors, although the corporation be exempted by statute from the duty of taking notice of equitable interests in its shares. Similarly, where property of an insolvent company is conveyed to a new corporation charged with payment of the debts of the old company, the directors of the new company, if they wrongfully misapply the assets, are liable in damages to the creditors of the old company. It has been held that, where a corporation infringes a patent, the officers, who act only on behalf of the company, cannot be held individually to account for the profits made by the infringement; but it is submitted that they would be liable in such a case to an action at law for damages by the owner of the patent. * * For mere nonfeasance directors should not be liable to outsiders in tort, and are therefore not liable ex delicto to persons who rely upon fraudulent misrepresentations of other agents of the company, in which the directors have not participated. But it has been held, though with questionable soundness, that directors who have notice that certain inferior agents are converting property deposited with the company for safekeeping, and who fail to put a stop to the wrongdoing, are liable ex delicto to the depositor for his damages”: 2 Machen, Corporations, §§ 1641-1644.
See, also, 10 Cyc. 840; Frost Mfg. Co. v. Foster, 76 Iowa, 535 (41 N. W. 212); Branch v. Roberts, 50 Barb. (N. Y.) 435.
3. The evidence in this case indicates that the principal defendant is a foreign corporation, all of whose directors reside in the State of Indiana, and none of whom, so far as we are informed, were ever in the State of Oregon; that the affairs of the corporation in this state were under the supervision of a general man*360ager, who received the grain and gave the receipts in question. There is nothing to indicate that the directors, or any of them, had personal knowledge or information as to the deposit of the grain in question until long after it had been ground, and disposed of. In fact, the testimony indicates that they were entirely ignorant of the deposit or conversion until long after the grain had been sold. The plaintiff testifies that about July 24,1907, he made a demand on the directors for pay for his wheat. In consequence of this demand we find in the minute-book of the board of directors, introduced in evidence by plaintiff, the following entry of the proceedings of a meeting—
“held to consider the claim of Messrs. Pelton & Dungan of Gold Hill, who demanded pay for certain amounts of wheat which they had stored in the company’s mill. The secretary was instructed to write Mr. E. C. Thompson, manager at Gold Hill in place of Mr. Leslie, that if the parties did not care to leave the wheat with the company until ground up and money realized from the sale, said Messrs. Pelton & Dungan would take out their wheat from storage. ’ ’
This indicates that at the time the demand for payment was made by plaintiff the directors were under the impression that the grain was still in the mill and subject to plaintiff’s order, and there is no testimony that they in any way directed or connived at its conversion, which was evidently an act of their manager, acting, not for the directors personally, but for the corporation. We are of opinion plaintiff has entirely failed to connect the defendants with the conversion of the property.
4. The evidence does not indicate that the directors knew the corporation to be insolvent at the time the wheat was received for storage. The details as to the *361organization and plans of the company are somewhat meager, bnt it appears that one of its objects was to develop and sell water power from Rogue River, and incidentally to operate a mill by means of the power thus secured, and in connection with the mill to operate and carry on a warehouse for the storage of grain, possibly with a view to ultimate purchase for the purpose of grinding it into flour in the mill. It was a venture requiring money to prosecute it to success, and this money was secured by floating bonds secured by a mortgage on the property. Like many such ventures launched by parties operating from a distance and ignorant of local conditions, it was unsuccessful and financially disastrous to the parties engaged in it, though at the time the wheat was stored it was a going concern, which, perhaps, under, better management, might have been successful. There is nothing to indicate that there was any design on the part of the directors to organize or carry on the corporate business with a view of embezzling property stored with it and thereby making a personal profit out of the transaction. They could only save themselves financially by making the venture a success, and their failure to do so, no doubt, brought on them personally serious financial loss. One of the directors testified that his individual loss was $14,000, and it is reasonable to suppose that the others suffered in like proportion to the amounts invested by them.
5. It is also claimed that the directors, after the conversion of the wheat and after the insolvency of the company became apparent, procured a decree of foreclosure to be rendered against the company, and bid the property in for their own benefit at much less than its real value, thus misapplying assets that should *362properly be applied to the payment of the claims of its creditors. Without entering into a discussion of the evidence adduced on this branch of the case, it is sufficient to say that plaintiff cannot by an action at law recover for himself assets of the corporation which the directors may have fraudulently appropriated. Having first liquidated his claim by an action at law against the corporation, the remedy of the creditor is by a suit in equity to uncover the assets so converted by the directors and subject them to his claim, in the same manner as an ordinary creditors’ bill to uncover and subject to execution property fraudulently conveyed to defeat creditors. His remedy is solely equitable: Elliott, Private Corporations, § 527; Priest v. White, 89 Mo. 609 (1 S. W. 361); Westinghouse Electric etc. Co. v. Reed, 194 Mass. 590 (80 N. E. 621, 120 Am. St. Rep. 576).
The judgment will be reversed, so far as it affects the directors, and the cause remanded to the Circuit Court, with directions to grant the motion for a nonsuit as to them.
Reversed. Rehearing Denied.