Court Opinion

ID: 9544810
Source: CourtListenerOpinion
Date Created: 2023-08-07 17:01:57.000786+00
Date Added: 2024-06-11T15:13:40.987468
License: Public Domain

Herd, J.,
concurring and dissenting: I concur with the majority’s reversal of the trial court’s judgment but for a different reason. I would reverse because the trial court erred in submitting the case on the theory of comparative negligence which is inapplicable to a gross negligence action.
I also disagree with the majority holding that a creditor of a corporation cannot maintain an action against a corporate officer and director for negligence in the discharge of his corporate duties resulting in injury to the creditor. I recognize there is a sharp division of authority on this issue. The authorities supporting denial of liability of the corporate officer and director to the creditor rely on the theory that the officer’s duty runs only to the corporation and its stockholders. The corporation or its stockholders are the only parties with a valid claim for negligent management. Fletcher, Cyclopedia of the Law of Private Corporations § 1181 (rev. perm. ed. 1975).
The other theory is that corporate officers and directors owe a duty to the corporation, its stockholders and those who do business with the corporation, its creditors. Annot., 25 A.L.R. 3d 941, 955, 989.
A great weight of authority permits creditors to recover from directors and officers whose misconduct in managing the affairs of the corporation results in losses. Fletcher, Cyclopedia of the Law of Private Corporations § 1182. Some cases, particularly those involving banks and other lending institutions, hold directors are trustees for creditors of the corporation. Trustees Mut. Building Fund, Etc. v. Bosseiux, 3 F. 817 (E.D. Va. 1880); Chicago Title & Tr. Co. v. Munday, 297 Ill. 555, 131 N.E. 103 (1921); Greenfield Savings Bank v. Abercrombie, 211 Mass. 252, 97 N.E. 897 (1912); Ellis v. Mercantile Co., 103 Miss. 560, 60 So. 649 (1912); Campbell, Receiver v. Watson, 62 N.J. Eq. 396, 50 A. 120 (1901). See also cases cited in Fletcher, Cyclopedia of the Law of Private Corporations § 1182. Courts allowed creditors’ suits under a similar theory in the following cases: Lyons v. Corder, 253 Mo. 539, 162 S.W. 606 (1913); Broderick v. Marcus, 152 Misc. 413, 272 N.Y.S. 455 (1934); Anthony v. Jeffress, 172 N.C. 378, 90 S.E. 414 (1916).
*286The foregoing appears to be a much sounder theory to me, particularly in light of the tremendous increase in the formation of small family corporations in recent years. In most of those instances, it is difficult to distinguish between the corporate operations and the individual operations of the stockholders. This case illustrates well the hazards of the rule adopted by the majority. Dighton Grain, Inc. is a family corporation engaged in a business that is extremely risky to the public. In addition to the perils associated with the grain business, Dighton Grain is dealing in the livelihood of a farm community protected by bond only to the extent of its measured storage and is doing six to eight million dollars in gross business per year but is capitalized for only $30,000. Further, the corporation was qualified as a Sub-chapter S corporation for tax purposes which permitted the stockholders to treat the income as personal rather than corporate to avoid double taxation but further diminished the corporate identity, merging it with the individual stockholders. The persons exposed to loss by corporate activity are those who do business with it and become corporate creditors. The limited liability doctrine for corporations is undoubtedly a necessary incentive to obtain the capital accumulation to finance an industrial society. That principle is not challenged here. A stockholder would remain insulated from liability for corporate negligence or debt, but an officer who injures a creditor through his gross negligence in failing to discharge his corporate duty should be liable for the injury. The creditors should first look to the corporation for a remedy, then to the individual officers and directors if the corporate judgment is unsatisfied. K.S.A. 17-7101.
Except for Mead v. Meeker, 3 Kan. App. 2d 15, 587 P.2d 1276 (1978), the appellate courts of Kansas have not specifically adopted the theory I espouse. However, we are approaching it. In the case of Patrons State Bank & Trust Co. v. Shapiro, 215 Kan. 856, 528 P.2d 1198 (1974), we held the bank directors liable for conversion on the theory they personally committed the wrongful act, and in McFeeters v. Renollet, 210 Kan. 158, 500 P.2d 47 (1972), we again pierced the corporate veil against the officers and directors of a corporation on the theory the officer committed the wrongful act to the creditor. In each instance the personal act established a link, ripening into a duty, between the corporate *287officer and the creditor. In Mead, the Court of Appeals followed Patrons on the theory a conversion had occurred to Mead’s property as the result of the Meekers’ negligence. Although a conversion did not actually occur, the Meekers’ gross negligence was sufficient to allow Mead to bring suit. He sold and delivered his grain to Dighton Grain, Inc., leaving a mere contractual obligation for payment running from the grain company to Mead. This was perhaps not as shocking or distasteful an act as conversion, but to a creditor who has lost his entire wheat crop by breach of contract, it might be a distinction without a difference. I would adopt Mead and broaden it to cover the facts of the Dighton Grain case on the theory that the gross negligence of the officers of a corporation which damages a creditor establishes the same obligation to a creditor that conversion or personal representation does.
Under the corporate code, K.S.A. 17-7101, we have a statutory remedy. It provides:
“(a) When the officers, directors or stockholders of any corporation shall be liable by the provisions of this act to pay the debts of the corporation, or any part thereof, any person to whom they are liable may have an action against any one or more of them. The petition in any such action shall state the claim against the corporation and the ground on which the plaintiff expects to charge the defendants personally.
“(b) No suit shall be brought against any officer, director or stockholder for any debt of a corporation of which he is an officer, director or stockholder, until judgment be obtained therefor against the corporation and execution thereon returned unsatisfied.”
It is argued the remedy provided is available only for liabilities created by “the provisions of the act.” I would construe the statute to provide the procedure for suit against corporate officers and directors regardless of the theory of liability. In Vernon’s Kansas General Corp. Code § 17-7101 (1975), the author’s comment states:
“This section expands upon Kansas law relating to suits against officers, directors or stockholders by providing that when they are liable to pay debts of the corporation, any person to whom they are liable may have an action against any one or more of them.”
Here the Meekers, all corporate officers, refused to take recommended precautionary measures after they learned of Gormley’s embezzlement and mismanagement. Gormley’s mismanagement of the corporation continued and was ignored by the corporate *288officers and directors. As a direct result of the Meekers’ willful and deliberate disregard of corporate affairs, Dighton Grain, Inc. became insolvent, virtually as if intended. We are reminded of the following statement of law from Beard v. Achenbach Memorial Hospital Assn., 170 F.2d 859, 862 (10th Cir. 1948):
“The directors of a corporation are charged with the duty of managing its affairs honestly and in good faith, and they must exercise ordinary and reasonable care in the performance of their duties. They must act with fidelity to the interests of the corporation, and they are jointly and severally liable for losses of the corporation proximately resulting from bad faith, fraudulent breaches of trust, or gross or wilful negligence in the discharge of their duties.”
We turn now to the remedies available to the creditor in the instant case. If the corporation had been insolvent, he could request the appointment of a general receiver to take control of the assets and business affairs of the corporation. K.S.A. 17-6901. An action could then be brought in the name of the receiver against the corporation. If the action were successful but the judgment was returned unsatisfied, an action could be brought against the corporate officers for gross negligence. The receiver action would be on behalf of all creditors. The trial court in the exercise of its discretion could refuse to appoint a receiver. Absent abuse of discretion, its refusal would stand. The receiver could refuse to pursue the creditor’s remedy against the officers; apparently, for any reason, as an “arm of the court.” Fletcher, Cyclopedia of the Law of Private Corporations § 7785. After the refusal, the creditor can pursue his individual remedy against the officers. Fletcher, Cyclopedia of the Law of Private Corporations §§ 7785, 7817. A creditor may, after he has exhausted all legal remedies, institute a creditor’s bill in the name of the corporation. Such an action could be on behalf of himself and all other creditors similarly situated and would require the claim be reduced to judgment prior to the suit. 21 Am. Jur. 2d, Creditor’s Rills §§ 9, 10, pp. 10-11.
Speer chose to pursue an individual remedy against Dighton Grain and its officers. I believe that remedy may be allowed and is not barred because of the presence of the receiver. The receiver in this case was not a general receiver in control of all of the corporate assets. The Kansas grain inspection department through the Kansas attorney general obtained the appointment of a receiver for Dighton Grain for the limited purpose of possessing all the open stored grain in the Dighton elevator and in terminal *289warehouses used by Dighton Grain, Incorporated. The state grain inspection department is responsible only for open storage and the required warehouse bond is based on the elevator’s storage capacity. In this case the bond was in the amount of $71,000. The receiver performed his limited function by possessing, selling and distributing the proceeds from the open stored grain to the owners on a pro rata basis. The receiver has no authority over the deferred contracts which are the subject of this suit. Clark, Law of Receivers § 786 (3d ed. 1959).
Finally, we note that where several actions are brought by individual creditors, the trial court may, in its discretion, consolidate those actions against Dighton Grain for trial pursuant to K.S.A. 60-242(a).
I would remand this case for a new trial.