January 18, 1929. The opinion of the Court was delivered by In 1925, the Bank of Latta closed its doors and a receiver was appointed to take charge of its affairs. Subsequently, this action was brought against the directors of the bank by the plaintiffs, certain of its depositors, upon the theory that the directors were liable to the plaintiffs, as depositors, for the loss of certain deposits made by them and received by the bank while insolvent. This appeal is from an order of his Honor, Judge Dennis, sustaining a demurrer to the complaint.
The allegations of the complaint, for the purposes of the demurrer, are taken to be true, and may be thus summarized: That the Bank of Latta was a corporation duly chartered and organized under the laws of the State, and that the defendants were the qualified and acting directors thereof; that the bank was insolvent from the ____ day of _________, 1924, to the _____ day of February, 1925, at which time its doors were closed and a receiver appointed to administer its affairs; that during this time the insolvent condition of the bank was well known to the defendants, or by the exercise of such diligence as the law requires and required of them as directors should have been well known to them; that the plaintiffs, at different times between the dates named, and while the bank was insolvent, without knowing or being aware of its insolvency, were allowed by the defendants to make certain deposits in the *Page 449 bank, and that each of them at the time of the closing of the bank had on deposit a certain named amount.
The complaint further alleged that since the closing of the institution, the receiver, Berry, had paid out to its depositors, including the plaintiffs, 10 per cent. in the way of dividends, but that the receiver had exhausted the resources of the bank and that nothing further remains to be paid to the depositors, including the plaintiffs.
The sixth paragraph of the complaint is as follows:
"That by reason of the negligence, mismanagement and unlawful conduct of these defendants as directors of said bank in receiving these deposits from the plaintiffs as hereinabove set forth while said bank was insolvent, or in permitting and allowing such deposits to be received by the officers of said bank and openly and publicly holding open the doors of said bank as a sound and solvent banking institution, while the same was insolvent and unsound, these plaintiffs have been damaged in the respective amounts appearing opposite their names above, less, however, ten per cent. thereof, on account of dividends already received by such plaintiffs, as aforesaid. That such loss and damage to these plaintiffs, as aforesaid, was brought about by and resulted from the careless and unlawful acts of the defendants as directors of said bank in receiving said sums from the plaintiffs for deposit, or in permitting same to be received at a time or times when said bank was insolvent, which insolvent condition was well known to said defendants as its directors at the time or times when such deposits were received, as aforesaid, or by the exercise of such case and diligence as was required of them by law as such directors, should have been known to them."
The complaint further alleges that the action was brought in the name of the plaintiffs for the benefit of themselves and all others like situated who may desire to come in and contribute to the costs thereof. The prayer is for judgment against the defendants, and each of them, for the amounts *Page 450 set forth in the complaint and for such other relief as the Court may deem just.
From the demurrers printed in the record, it appears that the defendants demurred to the complaint upon two grounds, which may be stated in substance as follows: (1) That the complaint does not state facts sufficient to constitute a cause of action either at common law or under the statute; and (2) that the plaintiffs have no legal capacity to sue.
Judge Dennis, before whom the matter was heard, passed an order sustaining the demurrers. We quote so much of the order as gives the reasons for his conclusions:
"The above matter comes before me on demurrers of the several defendants, challenging the sufficiency of the complaint on the ground that the same does not state facts sufficient to constitute a cause of action. The matter has been fully argued before me by counsel for plaintiffs and defendants. It seems to me to be very clear that the sufficiency of the complaint must be tested by the provisions of Section 3973, Volume 3, of the Code of 1922 (this provision being also contained in the Penal Code, Volume 2, where it is designated as Section 241). Unless a cause of action is set forth within the terms of that statute, I do not think that the plaintiffs can maintain the present action.
"Viewed in this light, it seems to me that the complaint undertakes to state a cause of action that would render the defendants liable to the plaintiffs on grounds and under conditions other than those set forth in the statute and for this reason I think that the demurrer should be sustained."
The plaintiffs appeal from the Court's order and assign error in two particulars: (1) Error in holding that the allegations of the complaint do not state a cause of action under Section 3973 of Code 3 of 1922; and (2) error in holding that, the liability imposed by this section being exclusive, the complaint does not state a cause of action independent of and outside of the statute. We shall consider these questions in inverse order. *Page 451
I. Are the directors of a bank liable at common law to one who deposits money therein after the bank has become insolvent, thereby suffering loss, and if so under what circumstances? Upon well-established principles, there can be no question that in such case, if the deposit is induced by fraud or deceit on the part of the directors, they would be liable. The present case, however, is not grounded on fraud or deceit, but only on passive negligence; and the question at issue therefore is whether, under the common law, a director who negligently allows a deposit of money in an insolvent bank, after he knows or should have known by the exercise of due care that the bank was insolvent, is liable to the depositor suffering loss on account of the insolvency. The answer to this question necessitates an inquiry into the relationship between depositors and directors — whether there is such relationship as would fix liability upon the directors under such circumstances.
In the cases involving this question some confusion has arisen through failure to distinguish clearly between the directors' relationship to the bank itself and that to depositors. Unquestionably directors, as the agents of the bank, owe to the bank itself the duty to exercise ordinary care in the management of its affairs. A violation of that duty would constitute negligence, and the bank, or its receiver when one has been appointed, or the creditors if the receiver should refuse to sue, may bring an action for the benefit of the bank against the directors for such negligence. A violation of the directors' duty to the bank, however, could not give rise to a cause of action in favor of the depositors, and any cause of action which the latter may have must be based upon some violation of a duty owing to them by the directors.
The depositor makes no contract with directors as individuals, his contract being entirely with the bank in its separate entity. Nor can we see any implied contract between the depositor and the directors as individuals, since *Page 452 the directors are only agents of the bank. It is suggested, however, that on account of the status of the parties the directors bear the relation of trustees to the depositors. On this question opinion is divided, but we think the better view to be that directors are not such trustees. Depositors do not deal with the directors, but with the bank itself, and the relationship between them and the bank is that of debtor and creditor; under these conditions, we cannot see how there could arise any such relationship between the directors, who are merely agents of the bank, and the depositors, as would create the former trustees of the funds of the latter placed on deposit in the bank.
In 3 R.C.L., at page 469, it is said:
"Aside from constitutional or statutory provisions, the directors or officers of an incorporated bank are not individually responsible, in an action at law, for injury resulting to a creditor or depositor, unless the injury was occasioned by the malicious or fradulent act of the person complained of. Mere nonfeasance will not answer; nothing short of active participancy in a positively wrongful act intentionally and directly operating to the prejudice of the person complaining will give origin to individual liability. As heretofore shown the better rule is that when the bank incurs losses through the merely negligent manner in which the directors perform their duties, the liability is one which accrues to the corporation, and gives no right of action to the bank's creditors as such."
And at page 474:
"There is nothing of either contract or trust, in all ordinary cases, to create any relation between the depositors of a bank and its directors, and at common law it would seem that there was no personal liability on the part of the directors to depositors merely on account of their assent to the receipt of deposits with the knowledge that the bank was insolvent."
In 7 C.J., at page 565, we find: *Page 453
"The directors of a bank are liable only to the corporation whose agents they are for violation or neglect of official duty; and, in the absence of actionable deceit, they are not liable to a creditor of the corporation for loss suffered through the neglect of their official duties."
In 21 Am. Eng. Ency. of Law (2d Ed), page 881:
"As a general rule, officers and directors of a corporation are not trustees of the corporate creditors and are not liable to them for negligence or mismanagement of the company's business, resulting in its insolvency, unless made so by charter or statute."
Mr. Thompson, in his valuable treatise on Corporations (volume 4, § 4137), says:
"We find that it has been held that the fact that directors and officers of a corporation have mismanaged its business does not render them liable to creditors, unless they are made liable by the provisions of the articles of incorporation or by statute."
And again, in section 4138:
"Neither, in the absence of a special statute, are the directors of a bank liable to a general depositor for mismanaging the affairs of the bank so that his debt is lost, for, unless they are made liable by statute, the breach of duty of which they have been guilty is to the bank, and not to the customers."
Hart v. Hanson, 14 N.D., 570, 105 N.W., 942, 3 L.R.A. (N.S.), 438, is closely analogous to the case at bar, being an action to hold a director of a bank liable for losses which the plaintiff sustained as surety upon a bond executed to indemnify the county against loss of a deposit of county funds in the bank. The action was based upon a charge, among others, that the bank accepted deposits from the county after it became insolvent, its insolvency being then known to the defendant. The allegations and proof showed "gross neglect by the defendant of his duties as *Page 454 a director, and no attempt on his part to have the bank discontinue business by reason of insolvency," though he knew the bank was insolvent when the deposits were made. In reversing a judgment for the plaintiff, the Court said:
"The fallacy which underlies each of the several theories upon which respondent seeks to sustain his right to recover in this action, is the assumption that the directors of a banking corporation owe some duty individually to each creditor of the corporation. That assumption is erroneous The creditor deals with the corporation and contracts with it, not with the individual directors. The directors are agents or representatives of the entire body of stockholders, and the relationship between the corporation and the directors is that of principal and agent. The agency of course implies a trust, but the obligations imposed by the trust are solely to the corporation whose agents and trustees they are, and like all other agents they are accountable for their stewardship to their principal alone. Creditors of the corporation are utter strangers to the obligations of the directors to the corporation."
Union National Bank v. Hill, 148 Mo., 380,49 S.W., 1012, 71 Am. St. Rep., 615, was a suit by general creditors of a defunct bank against the directors, based on alleged negligence and mismanagement of the directors. The testimony showed "the most absolute and unqualified inattention and neglect by the directors." The Court held that the directors were liable to the corporation, while it was a going concern or to the assignee after the assignment, for losses sustained by reason of their negligence, but sustained a judgment for the defendants, disavowing the theory that the directors of a bank occupy the position of trustee toward its creditors.
Savings Bank v. Caperton, 87 Ky., 306, 8 S.W. 885, 12 Am. St. Rep., 488, was a suit by depositors against directors to recover for deposits lost through the embezzlement *Page 455 of the cashier. The Court considered the question of the directors' negligence and laid upon them the duty of conducting the affairs of the bank in good faith and with ordinary care and diligence, but made it clear that this was a duty owing to the bank and not to the depositors:
"Directors are under no personal liability to the creditors of a bank by reason of a neglect of duty. They are the agents of the corporation, and could only be sued in this case by the creditor because of the refusal of the assignee to sue. * * * So, at last, it is the bank suing the directors in this case for a neglect of duty. * * *"
In U.S.F. G. Co. v. Corning State Savings Bank,154 Iowa, 588, 134 N.W., 857, 45 L.R.A. (N.S.), 421, the Court said:
"Our sole present inquiry is whether directors are liable for negligence only to a creditor of the corporation suing in his own right and for his sole benefit to recover damages which he has suffered through the insolvency of the corporation. We are of the opinion that the great weight of authority holds that directors are not liable in such an action for mere negligence, unless liability is imposed by statute, and that this Court has so held in effect, if not directly. * *
"Our conclusion is that, where a creditor of a corporation sues in his own personal right to recover from a director losses which he has sustained by extending credit to the corporation, his action must be founded on deceit, and not upon negligence. * * *"
In Deadrick v. Bank of Commerce, 100 Tenn., 457,45 S.W., 786, the Court held:
"That directors are liable in an action at law to their principal, the corporation, for losses resulting to it from their malfeasance, misfeasance, or their failure or neglect to discharge the duties imposed by their office, and in equity, to the stockholders, for these losses, the corporation declining to bring suit, is clear, upon the authorities. Though *Page 456 the corporation is the legal entity, yet the stockholders are interested in the operations of the corporation while in a state of activity, and, upon its dissolution, in the distribution of its property, after all debts are paid; and so its officers or agents stand in a fiduciary relation to both. But it is otherwise as to creditors. The directors of a going corporation, whether able to pay its debts or not, owe no allegiance to them. It is true that the creditors may extend credit upon the faith that the company has assets to pay its debts, and that these assets are prudently managed, yet they are strangers to the directors; they maintain no fiduciary relation with them; there is a lack of privity between the two. * * * A creditor of a going corporation, being thus a mere stranger, we think it clear that he can no more, after the suspension of the corporation by insolvency, either in law or equity, set in motion litigation to hold its directors liable for losses attributable merely to inattention, than could the creditor of any other insolvent debtor maintain a suit against his agent, under similar circumstances. In such a case as the one we are dealing with — that is, loss to the corporation resulting from mere negligence on the part of its directors — a creditor seeking to hold the directors liable for this loss, even in a suit like this, must rest his claim upon some provision of positive law."
In Landis v. Hotel Co., 53 N.J. Eq., 654, 33 A., 964, the complainant was both a stockholder and a creditor of an insolvent corporation and was endeavoring to hold its directors liable for losses sustained by their mismanagement. The Court made a clear distinction between the directors' liability to the complainant in these two capacities, holding that they would be liable to him as a stockholder, but not to him as a creditor, for losses resulting from their negligence, the reason for the distinction being that they bore a fiduciary relationship towards him in so far as he was a stockholder, but not in so far as he was a creditor. *Page 457 Swentzel v. Penn Bank, 147 Pa., 140, 23 A., 405, 415, 15 L.R.A., 305, 30 Am. St. Rep., 718, was an action by the assignee of a bank for the benefit of its creditors to hold the directors individually liable for certain amounts which had been fraudulently abstracted from the bank by its officers and lost in speculation For the purposes of that case, the Court seems to have considered the duty which the directors owed to stockholders and that which they owed to depositors as identical or closely similar, but held that "directors, who are gratuitous mandataries, are only liable for fraud or for such gross negligence as amounts to fraud."
In Fusz v. Spaunhorts, 67 Mo., 256, the Court said:
"Aside from statutory provisions or one of similar nature in the organic law, the directors or officers of an incorporated bank would not be individually responsible in an action at law, for injury resulting to a creditor or depositor, unless the injury were occasioned by the malicious or fraudulent act of the party complained of. Mere nonfeasance will not answer; nothing short of active participancy in a positively wrongful act intendedly and directly operating injuriously to the prejudice of the party complaining will give origin to individual liability. * * *"
In Robinson v. Hall (C.C.), 59 F., 648, which was an action to charge directors of a bank with personal liability for certain losses alleged to have occurred through their negligence, the Court said:
"Courts will not ordinarily give relief against directors to the extent of holding them personally liable, unless in cases of active or passive fraud or extreme negligence. Mere neglect to fully inform themselves of the affairs of the bank, even to the extent that they could be ascertained by an inspection of its books, is not held to be gross negligence, unless, perhaps, in cases where grounds of suspicion of the good conduct of their officers exist, and have come to their knowledge, or may reasonably be supposed to have been *Page 458 known to them. They are pecuniarily interested as stockholders in the faithful conduct of their officers, and it would be considered unjust for any slight reason to hold them further liable to what in many cases would be the total ruin, by liability for the losses of the bank in case of its failure."
See, also, Briggs v. Spaulding, 141 U.S. 132,11 S.Ct., 924, 35 L.Ed., 662.
There are numerous other authorities to the same general effect, but we deem further citations unnecessary. Our conclusion, in the light of the view herein expressed as to the relationship between directors and depositors, is that the complaint in this case does not state a cause of action under the common law.
We are well aware that there are authorities, both among the text-writers and the decided cases, supporting the contrary view. In some of these cases, the directors violated statutes regulating the management and operation of the bank; in others, they were guilty of such acts as would constitute misrepresentation, fraud, or deceit; in still others, their acts constituted gross negligence amounting to reckless disregard of depositors or to fraud, notable among such cases being Boyd v. Schneider (C.C.A.), 131, F., 223; Delanov. Case, 121 Ill., 247, 12 N.E., 676, 2 Am. St. Rep., 81; Seale v. Baker, 70 Tex., 283, 7 S.W. 742, 8 Am. St. Rep., 592; Townsend v. Williams, 117 N.C. 330,23 S.E., 461; Tate v. Bates, 118 N.C. 287, 24 S.E., 482, 45 Am. St. Rep., 719; Cunningham v. Shellman, 164 Ky.,175 S.W., 1045.
But while these factors are frequently present in such cases and doubtless influenced the Courts in their decisions, there are cases, including at least some of those just mentioned, in which the liability is referred to a relationship of trustee and cestui que trust held to exist between the director and the depositor. *Page 459
We have given long and painstaking consideration to this question, and we have reached our decision on what appears to be the weight of reason and authority. We are the more content with this conclusion because, in our opinion, to hold the directors of a bank liable as trustees for the depositors would place on them a burden not contemplated by the banking laws and not concordant with the banking usages and customs of the State.
We are not to be understood as saying that under no condition could a director be held liable to one injured through a deposit of money in a bank after it because insolvent; the facts and circumstances under which the deposit was made might be such as would amount to misrepresentation or fraud, and so render the directors liable to the injured depositor.Giddings v. Baker, 80 Tex., 308, 16 S.W. 33. No such facts, however, are alleged in the complaint in this case.
It may be well to add, before passing to the next phase of our discussion, that, on account of the peculiar nature and organization of savings banks in some jurisdictions, the directors of such banks are held to be trustees for the depositors. It is said that savings banks being organized without capital stock and their profits being paid to the depositors under a mutual plan of operation, the depositors stand in the same relation to them as that occupied by stockholders in commercial banks to such banks; and further, that, as savings banks are the repositories of funds of the poor, their management is safeguarded by an "elaborate statutory system," intended to protect the interests of depositors. The distinction between such banks and commercial banks is obvious. Hun v. Cary, 82 N.Y., 65, 37 Am. Rep., 546;Williams v. McKay, 40 N.J. Eq., 189, 53 Am. Rep., 775;Greenfield Savings Bank v. Abercrombie, 211 Mass. 252,97 N.E., 897, 39 L.R.A. (N.S.), 173 Ann. Cas., 1913-B, 420. *Page 460
II. We come now to the question of statutory liability. Section 3973, Vol. 3, 1922, Code, is as follows: "It shall be felony for any * * * director * * * of any banking institution to receive any deposits * * * after he shall become aware that such corporation is insolvent; * * * and [he] * * * shall become personally liable to the amount of such deposits * * * received by him, or with his knowledge or assent, in any such case, to the person thereby damaged. * * *"
As already shown, the complaint alleges that at the time or times the deposits of the plaintiffs were accepted, the bank's insolvent condition "was well known to said defendants * * * or by the exercise of such care and diligence as was required of them by law as such directors, should have been known to them." This is a material allegation and is in the alternative. Under the rules of pleading, it does not charge that the insolvent condition of the bank was actually known to the directors when the deposits were made, but only that by the exercise of due care on their part such condition would have been known to them. 21 R.C.L., 451; Greenfield Savings Bank v. Abercrombie,211 Mass. 252, 97 N.E., 897, 39 L.R.A. (N.S.), 173, Ann. Cas., 1913-B, 420; Anderson v. Railway Co.,103 Minn., 224, 114 N.W., 1123, 14 L.R.A. (N.S.), 886. The question is, therefore, whether the directors are chargeable with liability under the statute if by the exercise of due care and diligence they would have known of the bank's insolvent condition.
The appellants contend that the spirit of the statute includes not only actual knowledge, but also the imputation of such knowledge as the directors would have had by the exercise of ordinary care, and that in testing their liability under the statute it should be presumed that they actually knew the fact of insolvency, if the exercise of reasonable *Page 461 care and diligence would have made them aware of that condition.
The respondents, on the other hand, contend that before directors can be charged with personal liability it must be shown that they had actual knowledge of the bank's insolvency. On the question of the director's knowledge of insolvency, the statute uses the expression "after (he) * * * shall become aware that such corporation is insolvent." According to Webster's International Dictionary, "aware" means apprised; informed; cognizant; conscious. "Apprise" means to give notice, verbal or written; to inform. "Inform" means to communicate knowledge of or to; to make known; to advise; to tell, etc. "Cognizance" means apprehension by the understanding; conscious recognition or identification, etc. "Conscious" means aware or sensible (of an inward state or outward fact). It seems to us that under these definitions of "aware," which clearly reflect its ordinary, everyday meaning, the statute requires actual knowledge on the part of directors as a prerequisite to liability. As we have shown, there was no liability on the part of directors to depositors under the common law, and we think that the drastic liability imposed upon them by the statute should not be extended by the Court beyond that which the statute clearly implies under the common acceptation of the terms used.
In 3 R.C.L., at p. 474, it is said:
"In some jurisdiction statutes have made it a criminal offense for the officers of a bank to receive deposits after they have knowledge of the fact that the bank is insolvent, and it has been said that a bank officer who receives a deposit in violation of the statute is personally liable to the depositor for all damages proximately resulting. Other statutes expressly provide that the officer shall be personally liable for the deposits so received. To render a director, under such statutes, liable for deposits he must have had actual knowledge *Page 462 of the insolvency of the bank, and `actual knowledge' means a guilty knowledge, and not an innocent bona fide ignorance arising from neglect on his part to inquire into the financial condition of the bank."
Utley v. Hill, 155 Mo., 232, 55 S.W. 1091, 49 L.R.A., 323, 78 Am. St. Rep., 569, was a case brought by a depositor, under a statute, to hold the directors of a bank individually responsible for deposits made after the bank became insolvent. The statute in question was as follows:
"No president, director, manager, cashier or other officer or agent of any bank organized and doing business under the provisions of this Act or any law of this State, shall receive or consent to the reception of deposits or create or consent to the creation of any indebtedness" after he shall have had knowledge of the fact that "such association is insolvent or in failing circumstances. Every person violating the provisions of this section shall be individually responsible for such deposits so received and all such debts so contracted."
In construing the statute, the Court said:
"The word `knowledge' here employed must be taken in its common acceptation; that is, in the plain or ordinary meaning and usual sense of the word. * * * It ought to be so construed that no man who is innocent can be punished or endangered. * * * So treated, we may properly look to the source to which men generally apply for the meaning of the word `knowledge.' Webster's Dictionary defines `knowledge': `(1) The certain perception of truth; belief which amounts to, or results in, moral certainty; indubitable apprehension.' `(5) Information; intelligence; as "to have knowledge of a fact."' The knowledge which the law requires that a director shall have had means a guilty knowledge, not an innocent.bona fide ignorance arising from neglect to keep posted or to inquire. It must be construed to have been intended as a sword with which to punish the guilty, and a shield to protect *Page 463 the innocent. If this had not been the intention, the liability would have been made absolute and unqualified, instead of dependant upon knowledge. The framers of the organic and of the statute law must be held to have understood how the business of a bank is conducted. They must have known that the directors are drawn from the busiest men in the community; men who have carved success out of chaos, who have succeeded where the great multitude has failed; men who are not expected, and could not afford, to give their whole time to the business of the bank. The lawmakers knew that the active management of a bank usually devolves upon the president and cashier and that to the latter is usually intrusted the management of the details. They knew that few directors had the time, and fewer still the capacity, to examine the books of a bank, and ascertain its solvency; that even in their own business they could not take off a trial balance from the books they employed experts to keep for them, either because they had not time to do so for themselves, or because they did not have the capacity to do so. The law imposes a liability on directors of a bank which directors of no other corporation are subject to. It is a liability which is not limited to any specific amount; it is as broad as the wrongdoing — the fraud — of the director. It is a personal liability for every cent a depositor lost which a director consented to have deposited in the bank after the director shall have had knowledge of the insolvency of the bank or that it was in failing circumstances. It is an unlimited liability, but it is not an absolute one. It is qualified by a condition the existence or nonexistence of which may make the director liable for the total amount lost by the depositor, or may not make him liable for a cent thereof. The liability is measured by the knowledge."
Minton v. Stahlman, 96 Tenn., 98, 34 S.W. 222, was an action by a depositor against the officers and directors of a *Page 464 defunct bank to hold them individually liable for the loss of a deposit claimed to have been made at a time when the bank was insolvent.
The plaintiff charged that the defendants, "having due notice and knowledge of such facts and circumstances as, by ordinary diligence and business skill would have shown them its true financial condition, which was that of insolvency, and having reason and cause to know that any one depositing money or evidences of debt therein for collection, was liable to lose the money so deposited or collected, by reason of its insolvency, etc., did continue to keep open, and operate the same as a bank, and invite the custom and patronage of plaintiff and others; and that plaintiff, being induced thereby, and deceived and misled by such wrongful act of defendants, did, on or about the 25th day of February, 1893, deposit therein the sum of $1,197.60. There was repaid to plaintiff the sum of $200, but the remainder is yet due and owing, though demanded."
The defendants demurred to this charge on the ground that: "They are not liable as directors of the Bank of Commerce for receiving deposits when they merely had notice or knowledge of facts and circumstances which, by use of ordinary diligence and business skill, would have shown the said Bank of Commerce to be insolvent. In order to be liable, it must appear that they knew the said bank to be insolvent, and willfully and knowingly received the deposits."
After holding that, aside from statutory provisions, directors are not liable to depositors in an action at law by a depositor unless the deposit was induced by the fraudulent conduct of the director, the Court proceeded to a consideration of the directors' liability under a statute of Tennessee (Milliken V. Code, § 2507), which provided as follows:
"And if any director or directors of any of the banks in this State shall be guilty of any fraud or willful mismanagement of the affairs of such bank, by which any loss shall be *Page 465 occasioned to its creditors, such director or directors, upon legal ascertainment of the fact, shall be individually liable for such loss."
In sustaining the demurrer on this point, the Court said:
"It is not tantamount to a charge of intentional fraud or willful mismanagement to allege that, `having due notice and knowledge of such facts and circumstances as, by ordinary diligence and business skill, would have shown them its true financial condition, which was that of insolvency.' This, at most, is a charge of negligence and inattention, whereas, there is no liability to creditors or depositors, under this statute, without fraud or willful mismanagement."
While the ground on which directors were made liable by this statute was specifically stated to be "fraud or willful mismanagement," it must be borne in mind that knowledge is an essential element of fraud or wilfulness, and the case is cited for the purpose of showing that knowledge of the insolvency is not to be imputed to the directors from knowledge of such facts and circumstances as by ordinary care would have shown them the condition of insolvency.
In Mason v. Moore, 73 Ohio St., 275, 76 N.E., 932, 4 L.R.A. (N.S.), 597, 4 Ann. Cas., 240, the Court, construing a federal statute as to the liability of directors of a national bank says:
"As to the liability of the bank and its directors, U.S. Rev. Stat. § 5239 (U.S. Comp. Stat. 1901, p. 3515 [12 U.S.C.A. § 93]), provides: `If the directors of any national banking association shall knowingly violate, or knowingly permit any of the officers, agents, or servants of the association to violate, any of the provisions of this title, all the rights, privileges, and franchises of the association shall be thereby forfeited, * * * and in cases of such violation every director who participated in or assented to the same shall be held liable in his personal and individual capacity for all damages which the association, its shareholders, or *Page 466 any other person, shall have sustained in consequence of such violation.' We have in this section the statutory standard of liability, and it relates to every director who `participated in or assented to' the violations of the provisions of the title of which said section forms a part. If he did not participate in or assent to such violation, this statute fixes no individual or personal liability against him. In this case there was no evidence tending to prove that the defendants participated in or assented to any violation of the banking statute, except such participation or assent as may be ascribed to the attestation of the bank's report; and it would seem that such an act will not be sufficient to establish the participation and assent contemplated and penalized by the statute. Participating and assenting both imply affirmative action of some sort, as distinguished from mere silence and inaction."
Patterson v. Minnesota Manufacturing Co., 41 Minn., 84,42 N.W., 926, 4 L.R.A., 745, 16 Am. St. Rep., 671, was a suit by a creditor against a corporation and one of its directors.
A statute of the State of Minnesota (Gen. St., 1878, C., 34, § 142) contained certain provisions regarding the duties of directors of corporations. The section of the statute under which the action was brought provided that if any corporation organized under the authority of the act "shall violate any of its provisions, and shall thereby become insolvent, the directors ordering or assenting to such violation shall be jointly and severally liable, in an action founded on this statute, for all debts contracted after such violation."
The complaint charged violation of the statute by the directors through a loan of the corporation's credit as a maker or indorser upon an accommodation paper, and that in consequence thereof the company became insolvent. The Court said: *Page 467
"Plaintiff's contention is that it is the duty of a director to know what is being done in corporate matters; that it is negligence for him not to know, and therefore he is conclusively presumed to have known, and, not objecting he must be deemed assenting. Such a construction would impose this severe statutory liability for at least every act of mere negligence for which he would be liable at common law; but, as the act is highly penal, we do not think it ought to receive so broad a construction. The language of the various sections all tends to indicate that the Legislature intended that something more than mere negligence should be necessary to subject a person to those heavy penalties, something amounting to willful, or at least intentional, violation of legal duty, either ordering the act done, participating in doing it, or assenting to its being done with knowledge that it was being, or about to be, done."
Other authorities might be cited in support of our conclusion, but they would add nothing to what has been said. Under our construction of the statute, it imposes a liability upon the directors for every cent lost through deposits made in an insolvent bank at such times as the directors had actual knowledge of its insolvency; but the fact of such knowledge must be alleged in order to state a cause of action under the statute. As we have already indicated, under the allegations of the complaint this fact does not appear.
We may add, in passing, that in the argument here the respondents contended that the complaint is bad on account of misjoinder of causes of action. This point was not raised by demurrer and was not before the Court below, so it will not be considered here. Hickson v.Early, 62 S.C. 42, 39 S.E., 782; Sanders v. York County,106 S.C. 374, 91 S.E., 305; Savannah Chemical Co. v.Johnson, 105 S.C. 213, 89 S.E., 810.
The judgment of the Circuit Court is affirmed. *Page 468
MR. CHIEF JUSTICE WATTS and MR. JUSTICE BLEASE concur; MR. JUSTICE COTHRAN dissents; MR. JUSTICE CARTER did not participate.