Murphy v. Penniman

Boyd, J., delivered the opinion of the Court. The bill of complaint was filed in this case in the name of George Dobbin Penniman and Campbell Carrington, receivers of the City Trust and Banking Company, against seventeen of the eighteen directors of that company, who were elected at the annual meeting held on January 14th, 1903. The company was placed in the hands of the receivers on June 6th, 1903, by an order of Circuit Court No. 2, of Baltimore City, on a bill filed by John A. Sheridan Company et al., which, amongst other things, alleged the insolvency of the company, which the answer admitted. The bill in this case alleges that the defendants were all of the directors of the company from the election on January 14th, 1903, excepting one Frank J. Kohler, who left the State in the early part of June, 1903, and whose whereabouts-%, unkown to the complainants.

Thomas Hughes and Clifton Doll Benson, attorneys, were directed by the Court to institute and conduct, in the name of the receivers, the legal proceedings necessary for the enforcement of the liability of the directors of the company for certain losses, and this bill, as well as another against the di ⁴⁵⁶ rectors elected in 1502, which will be considered in a separate opinion, was accordingly filed by them. Frank J. Murphy, one of the defendants, filed two pleas which were overruled, and Wm. B. Thomas, another defendant, filed demurrers to the bill which were also overruled. Appeals taken by those defendants from the order overruling their pleas and demurrers, respectively, present the questions for our consideration.

We will first consider that of Mr. Thomas. There are twelve causes for the demurrers assigned, some of which can be considered together. 1. It will be well to first consider the cause assigned which numbered two. It is that Campbell Carrington is both a party plaintiff and a party defendant, and that his position as defendant is wholly antagonistic, inconsistent and irreconcilable with his position as plaintiff Mr. Carrington was one of the directors of the company and was also one of the receivers.

It is not a practice to be commended, to have a person in his representative capacity sue himself as an individual, especially under such circumstances as this bill discloses. It would generally be better for a receiver so situated to resign, or in case he declined to do that for the Court to remove him, and appoint another, if necessary. For even if a suit be brought in the name of the corporation,- the receiver has such control over its books, papers, effects, etc., as to make it very undesirable to continue in that control when a suit, particularly of this character, is being carried on against him. But in this case the Court having jurisdiction of the trust, authorized and directed Messrs.

Hughes and Benson to institute and conduct the preceedings in the name of the receivers, and hence although the receivers are the technical plaintiffs of record the solicitors in reality have control over the case. Any interference or obstruction placed in the way of the solicitors by the receivers, or either of them, could be reported to and corrected by the Court having jurisdiction over them, and hence the reason for the rule prohibiting, or at least disapproving of, the same individual being on both sides of the record does not have the same force as it ordinarily would. ⁴⁵⁷ Of course, we do not mean to intimate that either of these receivers have acted, or would act, improperly about the suit, as there is no such suggestion in the record, but we are speaking of what might happen under such conditions. While the practice of a person appearing on both sides of the record was condemned in Owens v. Crow, 62 Md. 497 , it was referred to as one -‘which has to some extent prevailed,” and neither in that case nor in those of Stein v. Stein, 80 Md. 306 , and Loney v. Loney, 86 Md. 655 , did this Court refuse to consider the questions involved by reason of such practice. Of course such a suit at law would present another question (Grahame v. Harris, 5 G. & J. 489 ), but in a Court of equity “where the Court can determine the respective rights of the parties without much regard to whether they appear as plaintiffs or defendants.” (15 Ency.

Pl. & Pr., 482), the rule is.not of such importance as to require the Court in all cases to dismiss a bill, or sustain a demurrer to it because such practice has been followed. The other defendants cannot be injured and we do not deem this a sufficient cause for the demurrer under the circumstances of this case. 2. The first, third and fourth causes assigned are to the whole bill, and may be considered together. They allege that the bill does not state a case which entitles the plaintiffs to such discovery or relief as is sought against this defendant; that it is vague, indefinite, ambiguous, uncertain and argumentative and does not state with sufficient certainty any fact which would give the plaintiffs cause of complaint against him.

There is no longer any question in this State about the jurisdiction of equity in cases of this character, Emerson v. Gaither, 103 Md. 564 , and cases there cited. In Booth v. Robinson, 55 Md. 438 , Alvey, J., in delivering the opinion, said that the cases “all concur in holding that, in equity, the directors are personally liable for the consequences of their frauds or malfeasance, or for some such gross negligence as may amount to a breach of trust, to the damage of the corporation or its stockholders.” That principle has been re ⁴⁵⁸ peated in Fisher v. Parr, 92 Md. 245 , and Emerson v. Gaither, supra. There is no charge of fraud against the defendants in this bill and with the possible exception of the charge of making loans to officers and directors, it can hardly be claimed that there is any malfeasance charged, which resulted in loss. So the question really is whether there is such negligence charged against Thomas as makes him responsible, if proven.

The bill is undoubtedly very skillfully drawn, although it is difficult to avoid the impression when reading it that some of the allegations have been made in a way that may make them sufficient on demurrer, but will be very difficult to prove. The expression running through the bill of “the said directors, and each and all of them' was evidently used to meet one of the questions raised in Fisher v. Parr, as to whether all of the defendants were charged with the acts of negligence, etc., relied' on, but the use of it in some connections would seem to be inappropriate, and to make some of the allegations uncertain, as to the meaning of the pleader. For example in paragraph (7), division (a), the several defendants are left in great uncertainty as to whether they are charged with permitting loose conduct of the. affairs of the company by being abseitt from meetings of the board, or by being present and taking part in them. Paragraph (8) is in direct conflict with that statement in (7) (a) which alleges “the failure of each and all of said directors to keep in touch with its management by attendance upon meetings of the board,” so far as W. F. Wheatly is concerned, for it shows that he attended every meeting during the year 1903, and it also shows that Messrs’.

Schulze, Pollock, Reitz, Blake and Carrington attended six out óf the eight meetings — there being only-five general and three special meetings that year. But while we see this and other apparently conflicting statements, the demurrers we are now considering are to the whole bill, and, under the well-established rules of equity practice, cannot be sustained, if there be sufficient in the whole bill to require the defendant to answer, although some parts of it may be defective. If we are to be governed by the decision of Fisher v. Parr , ⁴⁵⁹ which we must be, it seems clear that the grounds of demurrer now under consideration, being to the whole bill, con-not be sustained. The bill alleges that the Said directors, and each and all of them, “failed to perform each and every of their official duties to diligently and carefully administer the affairs of the company as they were” bound to do; that “each and all of them permitted the assets of the company to be wasted and the corporate property lost and squandered by negligence so culpable as to amount to a legal breach of trust;” that “their acts and omissions were not mere defaults or mistakes of judgment, but were inattentions to the duties of their trust and abuses of their authority;” that “they failed to do what men of ordinary caution and prudence ought to . do to protect the interests of the corporations;” that they disregarded without good cause, not only the charter and bylaws of the company and general laws of the State, which prescribed the limits of their authority, but the ordinary rules and habits of business, by which even fairly prudent men are guided; and many other similar charges.

But it does not stop there. It undertakes to make specific the charges of acts of negligence which are alleged to have resulted in great loss to the company. It specifies amongst other things the failure to attend meetings, failure to use due diligence in the selection of subordinate officers and agents, and to watch and scrutinize the acts and doings of the executive officers, agents and fellow directors, abuses of authority and breach of their contractual relations with the company, in wasting the assets and in making loans to officers and directors of the company, in contravention of its charter and by-laws, and alleges many other acts of omission and commission. It goes into considerable detail and as most of the charges are covered by Fisher v. Parr , they cannot be reached by demurrers to the whole bill.

We are therefore of opinion that these causes are not sufficient to authorize the demurrer to be sustained. 3. The fifth, sixth and eighth grounds are that the bill combines and unites separate and distinct demands against the defendant, and improperly joins wholly independent matters; ⁴⁶⁰ that it joins the defendant with other defendants'with whom he has no concern and no joint liability', as appears by the complainant’s own showing. These present the question as to whether the bill is multifarious. But there can be no doubt that the bill charges the defendant with responsibility for these acts alleged.

All of the defendants, according to the allegations, were directors from the election of January 14th, 1903, until the receivers were appointed. The.case therefore differs materially in that respect from Emerson v. Gaither. In that case there were seventeen defendants, five of whom were directors from January 1st, 1898, to December 22nd, 1900, when the bank closed, while the others served for different periods of that time. Some of the loans resulting in losses were not made until after some of the defendants ceased to be directors, others before some of them became such, and there were thirty separate and distinct transactions relied on.

The bill failed to show that some of- the defendants were in any way connected with or responsible for many of those transactions, or that others had anything to do with other acts-alleged. That bill was clearly multifarious as to the defendants whose demurrers we sustained, but we overruled that of Joshua Horner on the distinct ground that he had been a director throughout the period involved in that case, from January 1st, 1898, to the faijure of the bank. We said; “Mr. Horner and some others were directors from the organization of the bank to the day it failed. We do not think that such of the defendants can complain by reason of there being so many different causes of action alleged in the bill, as all of them are more or less connected and related to the same general question, the negligence and misconduct of the directors in the discharge of their duties from January 1st, 1898, to December 22nd, 1900, when the bank closed.” That applies to all of these defendants (excepting in so far as hereinafter stated), and in this bill it was distinctly alleged that' all of them were connected with or in some way responsible for all of the acts complained of, some by acts of commission and others of omission, failure to discharge the duties which they ⁴⁶¹ had assumed as directors.

We therefore are of the opinion that the fifth, sixth and eighth causes assigned are insufficient to sustain the demurrer. 4. The seventh ground alleges that the bill combines matters triable and determinable by a Court of equity with those triable and determinable at law. It is only necessary to say that if that be a ground for demurrer, it should specify what is alleged to be only triable and determinable at law. In short, the demurrer should have been aimed at those matters, and -not at the whole bill because it contains them, although the demurrer admits that there are other matters within the jurisdiction of a Court of equity. 5.

The ninth ground is that in the 18th and 19th paragraphs certain matters are alleged which, if they give complainants cause of complaint, are matters of complaint against the other defendants, but not against him, nor of relief against him, and the tenth ground is that these paragraphs allege certain matters which, if they give any cause of complaint against the defendant, are triable and determinable at law and ought not to be inquired of by this Court. The 18th paragraph sets out sec. 7 of the charter of the company which authorized it, amongst other things, to deal in notes, loans and bonds, and concludes: “provided, that no loan shall be made directly or indirectly to any officer or employee of the said corporation; and for any violation of this provision, the party or parties consenting thereto, directly or indirectly, shall be liable to said corporation for the amount so loaned and all losses or expenses that may result therefrom;” the 19th paragraph alleges that at various and frequent times divers loans were made through the executive committee “with the sanction and approval of its board of directors, and each and every of its directors, and in direct violation of its charter and by-laws and that all the aforesaid directors had constructive, if not actual, notice of the said loans, and are in consequence chargeable and responsible therefor. ” It alleges that the loans were never fully paid, but still continue as a loss to the company to the extent of $22,378.48. It then sets out ⁴⁶² a number of loans made by the executive committee, and in each instance those of the directors present when the loans were made are stated, and it is alleged that they were ratified and approved at the next succeeding meeting of the board of directors and the members of the board present are named. Mr. Thomas was not alleged to have been present at the board meetings excepting when one loan of $2,500'to Pollock was ratified and approved.

Then under head of “Loans made by the Board of-Directors” it is alleged that on February 1st, 1903, or thereabouts, “ loans were made to Frank J. Kohler, who was treasurer of the company, amounting to $50,000 at a special meeting of the board, and those present are named. It then alleges that they were ratified and approved at the next succeeding regular meeting of the board held February nth and those then present are named. In neither instance was Mr. Thomas present. Then follows a list of “Loans made by president and treasurer,” and' the names of those present when they were made, as well as all the directors present at subsequent meetings of the board when they were ratified and approved.

Thomas was present when two of those were ratified and approved. Six loans are alleged to have been made to Cochran and Stevens amounting to $25,400 which were endorsed by Frank J. Kohler as security and ratified and approved February 1 ith, when Thomas was not present. Two on February 14th to Baltimore Building and Construction Company of $2,550 and $5,000 and one on March 7th of $2,550 which were endorsed by Robert H. Pollock, a director, and Frank Kohler, who was treasurer, which were approved on March nth when Thomas was present. It is then alleged that other illegal and improper loans and investments of funds were made in violation of the charter and in disregard of their duty as directors, the particulars of which the complainants have not been able to ascertain with such certainty as to warrant them setting them forth at length, but they allege that great loss was occasioned by reason thereof. ⁴⁶³ The loans thus specified in paragraph (19) amount to $127,-400, out of which the plaintiffs only claim there is still due $22,378.45 — less then 18 per centum of the whole.

Inasmuch as the bill undertakes to give, to the very cent, the amount of alleged loss on these loans, it is difficult to understand why it did not specify the particular loans that caused that loss. It might work great hardship on Mr. Thomas, as well as other defendants, to withhold from them the knowledge that the plaifitiffs must have, if they correctly state the precise sum lost and thereby require them to defend loans amounting to $127,400 instead of only those by which the loss is alleged to have been incurred. Such practice should not be permitted by a Court of equity in a case where the liability of defendants' depends not upon the provisions of a statute alone, but, so far as Mr. Thomas is concerned, merely upon his alleged negligence, in not attending meetings of the board, and especially when the bill shows on its face that the plaintiffs rely on the constructive notice of the loans to such of the defendants as did not have actual notice. For that reason alone we would feel called upon to hold the 19th paragraph bad on demurrer, but that is by no means the only ground for so holding it.

The alleged -loans of $50,000 to Frank J. Kohler on February 1st, 1903, “or thereabouts,” were made at a special meeting of the board, at which, the bill shows, Thomas was not present. Conceding, as we must, under the decision in Fisher v. Parr and other authorities, that directors may be liable for losses occurring through their habitual non-attendanee of meetings of the board, the principle should not be carried to the extent of holding a director (especially one living at a distance from where the company’s business is conducted) liable for what occurred at a special meeting, at which he was not present, unless there be some allegation (and proof when evidence is taken), to connect him with the illegal acts beyond his mere absence. We are not willing to give our approval of any doctrine that would require directors to attend every regular meeting of the board, much less ⁴⁶⁴ every special meeting. If such principle is announced as the law of this State it will be impossible in many cases to obtain responsible persons as directors.

In the city of Baltimore it is doubtless true that financial institutions have often had the benefit of the advice arid aid of the most competent men in the city, for little or no compensation, although their holdings of stock were' small as compared with other stockholders, but such men would hesitate to continue as directors in such institutions, if they are to be held responsible for such losses as are alleged in this paragraph, on the theory of this bill. We do not mean to intimate that directors should be free from liability simply because they were not present at a meeting of the board when some unlawful or improper act was done, which resulted in loss to the company, if it was their duty to be there, and their absence in any way caused the loss, nor do we mean to say that there may not be cases in which the burden would be on the directors to allege and prove sufficient excuse for non-attendance, although the bill does not specifically allege the contrary, but we do say that there is nothing in this bill, as to these loans, which shows that W. B. Thomas was “consenting thereto, directly or indirectly,” to use the language of the charter. Certainly his absence from a special meeting, of which it is not alleged or suggested that he had notice, which the by-laws expressly'require, was not sufficient, and his mere absence from the next succeeding regular meeting (February I ith), at which it is alleged that the loans were ratified and approved were not sufficient to show his consent, as contemplated by the charter. As the bill -affirmatively shows he was not present on either occasion, there must be some allegation to show his consent, directly or indirectly, and his mere absence from the meeting, if it be assumed he had notice, cannot be fairly said to be “consenting thereto, directly or indirectly,” to an act for which the statute imposes a penalty on parties so consenting.

The bill does not disclose the effect of the loans being subsequently “ratified and approved” at a regular meeting. It is not easy to see how- that could have caused any loss to the ⁴⁶⁵ company, for if Kohler got $50,000 on February 1st, the subsequent approval or disapproval of it would in all probability have been of little consequence, as Kohler already had the money, but assuming that it did in some way cause some loss, we are of the opinion that Thomas’ absence from that meeting does not make him liable, under that provision of the charter, as it cannot be properly so construed. We have not thought it necessary to refer to the fact that February nth, was the first