Emerson v. Gaither

Boyd, J., delivered the opinion of the Court. The appellee was appointed receiver of the American National Bank of Baltimore, and by direction of the Comptroller of the Currency filed this bill against the directors of the bank and the executors and distributees of Frederick Walpert, deceased, who was in his lifetime a director. The defendants are sought to be held liable for a number of acts alleged to have been illegal and negligent — those particularly relied on being that they “knowingly suffered and permitted loans to be made in excess of one-tenth of the amount of the capital of said bank actually paid in,” to certain persons and corporations named; that they declared and paid two dividends at times when the bank was in such condition that dividends could not be lawfully declared; and that they permitted the president and cashier to loan the funds of the bank to themselves, their relatives and companies in which they were interested in excessive amounts. The bill alleges that the bank became insolvent by reason of the negligence and acts of the directors and the losses thereby incurred.

Demurrers were filed by several of the defendants, and they having been overruled these appeals were taken. The principal questions presented for our consideration are: ⁵⁶⁷ ist. Has a Court of equity jurisdiction to grant the relief prayed ? 2nd. Is the bill multifarious ? 3rd.

Is the suit barred as to Frederick Walpert, who died more than three years before the bill was filed, and as to Isaac E. Emerson, who ceased to be a director more than three' years before the filing of the bill ? 4th. Are the allegations sufficient to make the distributees under the will of Frederick Walpert liable ? First. The authorities are not uniform as to how far a Court of equity has jurisdiction in suits by corporations, or their receivers, against directors who were guilty of negligence or of acts contrary to some statutory provision.

It cannot be denied that there may be charges of mismanagment or negligence, causing loss or injury to the corporation, for which there could be no reason for going into equity — the corporation having a complete and adequate remedy at law. In 3 Clark and Marshall on Cor. Sect., 755, it is said that “thecorp oration may maintain an action at law against them at common law — an action on the case — to recover damages,” but those authors go on to say, ‘‘Or it may maintain a suit in equity when any special ground of equitable jurisdiction exists, as in a case where an accounting or discovery or injunction is necessary.” Judge Thompson in the Article written by him on Corporations in 10 Cyc., thus speaks of the subject on p. 836; ‘‘The proper remedy is said to be an action at law for damages, and not a bill in equity, where no accounting of the financial condition of the corporation is necessary to determine the extent of their liability. The jurisdiction of Courts of equity to compel unfaithful directors to account to the corporation, or to its representative, for frauds and breaches of trust has been well established since the time of Lord Hardwicke; and unquestionably this is a proper forum in nearly all such cases, although this statement does not exclude the jurisdiction of Courts of law in cases appropriate for the exercise of that jurisdiction, the two remedies being often concurrent.” ⁵⁶⁸ The Court of Appeals of New York has gone as far as any Court we are aware of in denying the jurisdiction of equity against delinquent directors at the suit of a receiver.

It would be difficult to point out any substantial differences between the case of Dykman v. Keeney, 154 N. Y. 483 , and the one now under consideration. That case followed O’Brien v. Fitzgerald, 150 N. Y. 572 , and Empire State Bank v. Beard, 151 N. Y. 638 . It was conceded that some observations by the Judge who delivered the opinion in O'Brien v. Fitzgerald, 143 N. Y. 377 (when that case was first before the Court) indicated that such an action might lie in equity, but that was finally determined to the contrary on the later appeal. In Brinckerhoff v. Bostwick, 88 N. Y. 52, the same Court said, “The liability of the directors of corporations for violations of their duty or breaches of the trust committed to them, and the jurisdiction of Courts of equity to afford redress to the corporation, and in proper cases to its shareholders, for such wrongs exist independently of any statute.” That was a proceeding by a shareholder and in Dykman v. Keeney, it was referred to to show that an action in equity will lie by a shareholder, and it was said that there was “a wide and vital difference between such a case and one where the action is by the corporation against its delinquent directors.” There is unquestionably a distinction between the two classes of cases, as a director is an agent of the corporation in its corporate capacity, and he accounts primarily with the corporation, which holds the legal title to the assets, but there is no privity at law between the stockholder and the directors, and hence when he can sue at all, a Court of equity is generally the proper tribunal in which to enforce his rights, which are equitable and not legal — unless the statute gives him the right to proceed at law.

But while we must recognize that distinction, is the corporation, or its receiver to be denied that right under such circumstances as are alleged in this bill ? There can be no doubt that the opinions delivered in Booth v. Robinson, 55 Md. 419 , and Fisher v. Parr, 92 Md. 245 , indicate that this Court has taken a position contrary to the New York cases, but it is contended ⁵⁶⁹ that the precise question raised by these demurrers was not involved in either of those cases. In Booth v. Robinson , Judge Alvey, after stating that directors in joint stock corporations were not in the strict and technical sense of the term trustees for the stockholders, said: “They are, however, in one sense trustees, and they occupy a fiduciary relation to the corporation and its stockholders. * * * And if this relation and duty be violated, to the injury of the corporation or its stockholders, the law affords an ample redress for the wrong against the guilty parties.” He then referred at some length- to the case of Charitable Corporation v. Sutton, 2 Atk. 400, and said: “And in Sutton’s case the Lord Chancellor held that directors of a corporation are liable in equity to the corporation, not only for gross frauds and breaches of trust, whereby the assets of the corporation are wasted, but are also liable to the corporation, if the assets of the corporation have been wasted by negligence on their part so gross as to amount to a breach of trust.” After referring to Spering's Appeal, 71 Pa. St. 11, and other decisions, he added, “They all concur in holding that, in equity, the directors are personally liable for the consequences of their frauds or malfeasance, or for such gross negligence as may amount to a breach of trust, to the damage of the corporation or its stockholders.” Then after showing that directors are not responsible for the consequences of mere unwise or indiscreet management, and pointing out the character of proof necessary to render them liable, the opinion proceeds, “In these cases the proper and primary party to complain and call the directors to an account, in a Court of equity, for fraud or breaches of trust, in the management of the affairs of the corporation, is the corporation itself; because the duty is owing, and the wrong is done directly to the corporation, and only indirectly to the shareholders.” It then points out what is necessary to enable a shareholder to maintain a bill against directors for such fraud or breaches of trust.

So although that was a bill filed by stockholders, the cases cited and the reasoning of the Court tend to establish the right ⁵⁷⁰ of the corporation to sue in equity. The case distinctly holds, not only that directors are in a sense trustees and occupy a fiduciary relation to the corporation and its stockholders, but that their negligence may be so gross as to amount to a breach of trust. Then in Fisher v. Parr, which was a suit in equity by receivers against directors, Judge Fowler said: “The law appears to be well settled, in this State at least, that a Court of equity has jurisdiction to entertain a bill filed by a corporation to enforce the personal liability of directors for the negligent performance of their duties, and that the corporation or its receiver is the proper and primary party to cdmplain and call the directors to an account.” It is true that the defendants did not specifically rely upon want of jurisdiction in that case, but some of the grounds of demurrer were broad enough to include that, and the Court did in fact pass upon the question. If a Court of equity had no jurisdiction to grant the relief prayed, it was idle to remand that case for further proceedings, and it will be observed that the dissenting opinion of the Chief Judge, which was concurred in by Judge Schmucker and the writer of this opinion, not only did not question the jurisdiction of a Court of equity to grant such relief under proper allegations, but referred to a number of cases which sustain the right of a corporation, or its representative, to sue in equity, including Wilkinson v. Dodd, 40 N. J. Eq. 123; Spering's Appeal, supra; Sutton's Case, 2 Atk. 400.

It must therefore be admitted that in so far as this Court, has indicated its views on the subject, it is not in line with the New York cases, but with those adopting a contrary doctrine. There are many decisions elsewhere in which the Courts have recognized the jurisdiction of equity in such cases. In Cockrill v. Cooper, 86 Fed. 7 , the Circuit Court of Appeals, through Judge Thayer, delivered a strong and convincing opinion on the subject, and referred to many authorities. In that case the suit was against a number of directors, and the personal representatives of others, whose terms of service were not identical.

It was said that if a receiver must sue at law, it would not only require numerous actions, but “very likely several ⁵⁷¹ separate actions would have to be brought against some of the directors, to comply strictly with the rules of procedure at law governing the joinder of parties,” and that “It is also fair to infer from what is stated in the bill that the excessive loans therein complained of were inaugurated by one set of directors, and either continued, renewed, or enlarged by another, so that a suit brought against any one of the directors would probably involve an inquiry into the proceedings of the board of directors, and into many of the financial transactions of the bank for the entire period during which its affairs are alleged to have - been mismanaged.” In that case there was also the charge of declaring dividends in violation of the revised statutes, and it was said of that: “An investigation into the merits of this charge will necessarily involve a critical inquiry into the financial condition of the bank on each of said occasions; and as this Court held in Hayden v. Thompson, 36 U. S. App. 361, 369; 17 C. C. A. 592 , and 71 Fed. 60 , that is an inquiry which is peculiarly appropriate to a Court of Chancery, since an account of any considerable length or intricacy cannot be stated before a jury with that degree of fairness and accuracy which is necessary, or at least desirable, in a judicial proceeding.” The learned Judge very forcibly showed why Courts of equity are best adapted to adjusting such controversies as usually arise between receivers of insolvent corporations and their directors or managers, and added that “In a Court of law there' is always a greater probability that the guilty will escape detection, or that the innocent will be made to suffer for the wrongful acts of others ” Not only can a multiplicity of actions be prevented by a proceeding in equity to redress the wrongs complained of, which is a matter proper to be considered, but it would seem that complete justice to all parties can be thereby better assured than by -suits at law. It would be practically impossible for a jury to properly dispose of all questions raised by this bill, and when^he- fiduciary relations which the directors occupy to the corporation is remembered there would seem to be no reason why Courts of equity should not have power to determine ⁵⁷² such controversies — especially in this State where the tendency is to extend rather than limit the jurisdiction of Courts of equity. In addition to authorities already cited, we would mention the following which have either expressly or impliedly decided that Courts of equity have jurisdiction in such cases. Briggs v. Spaulding, 141 U. S. 132 ; Robinson v. Hall, 63 Fed. 222 ; Hodges v. Screw Co., 1 R. I. 312; Citizens Loan Assn. v. Lyon, 29 N. J. Eq. 110; Citizens B. & L. Assn. v. Coriell, 34 N. J. Eq. 383; Williams v. McKey, 40 N. J. Eq. 189.

Without deeming it necessary to more particularly state the allegations in this bill, we are of the opinion that the demurrers cannot be sustained on this ground. Second. ' There is perhaps more confusion, real or apparent, iii die authorities on the subject of multifariousness than any other connected with equity procedure. This is in part owing to the fact that there is no rule on the subject of universal application, and much is left to the discretion of the Court to be determined by the facts of each particular case. The tendency of the Courts has been to overrule the objection, but when a Chancellor can see that a bill undertakes to burden one or more defendants with matters with which they are not connected, and not responsible for, or that the bill is liable to create confusion by reason of the joinder of improper parties who have no privity with each other, or because several distinct matters have been blended, which have no connection with each other, he is at least called upon to give it a most careful scrutiny.

There is no occasion to go outside of this record to give illustrations of what we have in mind. The defendants named in this bill are sixteen persons who at sometime had been directors of this bank, and the executors and the distributees of another person who had in his lifetime been a director. It states the times during which the different persons were directors, but as it is alleged that on January 1st, 1898, the bank was solvent, and only, complains of what was done after • that time, it is not necessary to go back of that date. It charges that Messrs.

Horner, Bauernshmidt, Hartman, Wool- ⁵⁷³ ford and McPhail, were directors from January 1st, 1898, to December 22nd, 1900; Mr. Brinton to May 3rd, 1898, Mr. Walpert to September 29th, 1898; Messrs. Ellis and Dickey to November 29th, 1898; Mr. Emerson to March 20th, 1899; Mr. Malster to January 19th, 1900, and that the following served to December 22nd, 1900, from the dates named, towit: Mr. Thompson from August 5th, 1898; Mr. Harden from October 14th, 1898; Messrs. Abercrombie and Hertel from January 12th, 1899, and Messrs. McDevitt and Marts from January 12th, 1900.

The first ground of complaint is that “during tlieir respective periods of service the above-named members of the board of directors of said bank, in violation of sec. 5200 Revised Statutes of the United States, knowingly suffered and permitted loans to be made in excess of one-tenth of the amount of the capital of said bank actually paid in to each of the following persons and corporations, that is to say:” Then follow the dates, ampunts, and names of the parties. The first item is one of January 14th, 1898, for $10,000 loaned to the Automatic Telephone Exchange Co. in which Joshua Horner, the president of the bank, was an officer, and then a number of other loans to that company are mentioned, amounting in all to over $120,000. The next complaint is for loans to ‘‘an irresponsible syndicate,” of four sums amounting to $145,000; then $10,000 to the Columbia Iron Works, at a time when it already had $50,000, and then six sums at different times amounting to $22,140, to Joshua Horner, or companies he was interested in. The next complaint is for declaring two dividends of $5,000 each, on December 30th, 1898, and June 30th, 1899, when the bank was in such a condition as to make them unlawful.

The seventh paragraph of the bill charges that the defendants permitted the president and cashier to make large loans to themselves, their relatives and companies in which they were interested, and although the amounts are stated, no dates are given and so far as we can see most of them are included in these mentioned above. The various items referred to in the bill amount to over $300,00 o ⁵⁷⁴ as being improperly loaned arfd paid out, but in the ninth paragraph the loss to the bank is alleged to be $200,000 by reason of the misconduct and neglect of the defendants. The injustice likely to follow, if such a bill as this is to be sustained, will be best shown by taking individual instances, although some of them did not appeal and we suppose did not file demurrers. It will be observed that Mr. Brinton ceased ■ to be a director May 3rd, 1898, and Waipert died September 29th, 1898.

The only item alleged to have been unlawfully loaned before those dates was that of January 14th, 1898, for $ 10,000, while altogether there are thirty specific acts complained of in the bill — twenty-nine of which those two parties were in no wise connected with, so far as the bill discloses. It is true there may be some general allegations that might be said to be broad enough to include all the defendants, but if that be conceded, they are contradicted or limited by the more specific allegations, giving the dates, etc., of the transactions. Can Mr. Brinton or the representatives of Mr. Waipert be required to answer twenty-nine charges amounting to over $300,000, with which they had nothing to do, simply because they were directors when the one unlawful transaction was permitted? Upon what principle of justice or of equity pleading can that be supported?

It is not evert alleged that the loan of $10,000, with which they were connected, was not repaid to the bank, and as it was the first item complained of, it may have been included in the $100,000, or more, which must have been paid back from the unlawful loans, if the bank only lost $200,000, as the bill alleges. Messrs. Ellis and Dickey, who retired on November 29th, 1898, could only have been connected with three transactions, amounting to a little over $17,000 and Mr. Emerson with only four of the loans amounting to