
    Daniel Schout, Jr., v. The Conkey Avenue Saving, Aid & Loan Association.
    (Supreme Court—Monroe Special Term,
    February, 1895.)
    A loan association whose articles provide that the shares of members who-file applications for withdrawal shall be refunded as soon as the necessary funds are in the treasury has no legal .right to disregard it by appropriating any of the money in the treasury -to the making of loans .while withdrawal notices are on file which have not.been honored.
    A director of the association who assented- to one of such unauthorized loans, and knew or ought to have known of the others, is estopped from thereafter complaining thereof in his own behalf, and cannot maintain an action for the amount of his shares in pursuance of a withdrawal notice because of such improper use of the funds.
    Action to recover the amount of plaintiff’s shares in the defendant association.
    
      
      F.'B. (& F. 8. Hutchinson and H. J. Stull, for plaintiff.
    
      Fdwin McKnight and H. Nelson Peck, for defendant.
   Davy, J.

This action is brought to recover $1.210.35. it being the amount credited to the plaintiff upon_the—books-of the defendant for principal and dividends. It appears from the evídénceTEatthej^tiñtiff, who_wag_a_member of the defendant’sjban association on the 16th day of December,, 1891, filedjt written notice withdrawing his moneyed-interests-in the association. Article 14, section 2, of the articles of association provides that members, not having received a loan, may withdraw one or more of their shares from the association at any time by giving notice in writing to the board, and the liability to pay further dues and the right to dividends shall cease with the filing of said notice.. Applications for withdrawals shall only be received in the regular order of . business, and the principal theretofore paid on such share or shares shall be refunded to such members as soon as the necessary funds are in the treasury.

The plaintiff bases .his right to recover in this action upon the ground thatthe money which was in the treasury when his withdrawal notice was .filed, instead of being applied upon his claim, was loaned . to-its members contrary to the rules of the association. There can. be "no question'but what the officers and members of the defendant were bound to observe the rules prescribed- i-n its constitution and by-laws, which, were printed in- a book issued to every shareholder, who was presumed to know what they were. The powers and duties therein expressed and imposed were binding upon the association and its members. The defendant, therefore, had no legal right to disregard them by appropriating any of the money in its treasury to the making of loans while the plaintiff’s withdrawal notice was on file until his claim had been paid in f-ull.

In the case of Wolfe v. Conkey Avenue Saving, Aid & Loan Association, 75 Hun, 203, which was an action against this same defendant, Dwight, P. J., says: “ The defendant had no right, under the article of its association, to appropriaté any of its funds to the making of loans while withdrawal notices were on file which had not been honored.” The plaintiff, therefore, under the decision of the court' in the casé last cited, was entitled to the payment of his claim when reached, and, if the directors disregarded the rules of the association and loaned money to its members which should have been applied in payment of its indebtedness to the plaintiff, the defendant is liable in- this action, unless the plaintiff has waived his right to the-fund, or has done some act which, under the rules of equity, estops him from maintaining this action.'

It appears from the evidence that at the time the loans were made the plaintiff was one of tjie-d-i-raators of the defendant and approved of the Eoss loan, which he now concedes was made contrary to" the rules of the • association. He attended the meetings of the board from time to time during the period that the other irregular loans were being made. As a director he had access to the books of the association at all times, and he knew or ought to have known that his associates were making the loans which he now contends were unauthorized. While directors, as a general rule, are not liable for errors of judgment, unless they ,are grossly wrong, yet, by accepting the trust, they are obliged to faithfully execute. it. The plaintiff, therefore, by accepting the office of director was required to execute it with fidelity and reasonable diligence. It was his duty to attend the meetings of the board with reasonable regularity and to exercise ordinary diligence in ascertaining the financial condition of the association. He knew that. the Eoss loan, which received his approval, was irregular. That fact was sufficient to have put any prudent man' who was acting as -a director on his guard, and upon inquiry as to whether other loans of that character were being made. If he grossly neglected his duties lie cannot claim protection on that ground, but must be held, in the eyes of the law, just as responsible for the irregular loans as the other directors. The learned counsel for the plaintiff seeks to avoid the force of an equitable estoppel by claiming that the plaintiff was ignorant of these loans with the exception of the Eoss loan. The evidence in the case does not warrant me in reaching such a conclusion. It appears that he attended at least fifteen meetings while he was a director, and one of the officers testified that he attended the meetings of the board regularly. It will not do to- permit him to plead ignorance on the ground of neglect of duty. The rule is, that an absent director"! may be held equally responsible with his associates in case of extreme neglect of duty in omitting to attend the board meetings, or where the wrongful acts of his associates have come to his knowledge and he acquiesces and takes no steps to avert their injurious consequences, when by due diligence he might have prevented the wrongful acts from being done. Knowlton v. Congress & Empire Spring Co., 57 N. Y. 518-537; Knox v. Baldwin, 80 id. 612; Robinson v. Smith, 3 Paige, 222; Hyatt v. Clarke,. 118 N. Y. 567; Adams v. Mills, 60 id. 538; Lindner v. Sahler, 51 Barb. 323; Briggs v. Easterly, 62 id. 51; Bronson v. Dimock, 4 Hun, 614.

The law seems to be well settled that even a stockholder in a corporation who participates in an unauthorized act prejudicial to his interest, and acquiesces in the transaction, is estopped from afterwards complaining either in his own behalf or in the behalf of the corporation.

It was held in Sheldon H. B. Co. v. Eickemeyer H. B. M. Co., 90 N. Y. 612, that where stockholders, with full knowledge, ratify a transfer and affirm the settlement, the act, though beyond the powers given the trustees by the charter, could not be subsequently avoided by the stockholders or by the corporation. The learned judge who wrote the opinion of the court says : “ It is not needed in such a case that there be an express assent on the part of. the stockholders to work an equitable estoppel. When they neglect to promptly and actively condemn the unauthorized act, and to seek judicial redress after knowledge of the committal of it, this will be deemed an acquiescence in it.” Kent v. Quicksilver Mining Co., 78 N. Y. 159-187.

The rule in regard to directors is much more strict. They' are intrusted with the management of the corporate business - and are required to exercise the same degree , of diligence and care that men of ordinary prudence and skill usually exercise in the management of similar business for themselves. The business of the defendant could not be done except by its-directors, who are required to exercise a general supervision over the affairs of the association. The shareholders had a right to assume that the directors would do their duty, and if they did not, they had a right to hold them personally liable; for a gross neglect of duty. The law on this subject is clearly stated by Judge Earl, in Hun v. Cary, 82 N. Y. 65. He says: “ The trustees are bound to observe the limits- placed upon their powers in the charter, and if , they transcend such limits and cause damage, they incur liability.” He also says-that when one deposits money in a savings hank or takes stock in a corporation, thus divesting himself of the immediate; control of his property, he expects, and has the right to expect, that the trustees or directors, who are chosen to take his-place in the management and control of his property, will exercise ordinary, care and prudence in the trusts committed, to them; the same degree of' care and prudence that men-prompted by self-interest generally exercise in their own affairs. When one voluntarily takes the position of trustee- or director of a corporation, good faith, exact justice and public policy unite in requiring of him such a degree of care and prudence, and it is a gross breach of duty not to bestow them.” '

If the plaintiff in this action had attended to his ■ duties-properly as a director, he certainly must have known the nature ayd extent of the business that was being transacted by the board, and that unauthorized loans were being made. It w.ould be unjust, therefore, to permit him now to take advantage of his own negligent acts to the injury of innocent shareholders who have filed their applications of withdrawal-In Knox v. Baldwin, supra, Judge Dauforth says: “A director cannot be permitted, either alone or with his associates, , to pursue a remedy which, if enforced, would enable him to profit by his own wrong or negligence.” The plaintiff, therefore, is estopped from maintaining this action, and must wait until the defendant collects a sufficient sum to pay his claim as provided by its constitution and by-laws.

The complaint, therefore, is dismissed, with costs..  