
    P. T. ANTHONY v. R. O. JEFFRESS et al.
    (Filed 9 November, 1916.)
    1. Corporations — Gross Mismanagement — Directors’ liability.
    Where the directors of a corporation appoint a committee to act with and in supervision of the manager in the conduct of the corporate affairs, and the directors have met only three times during the corporate existence of about two years, first to organize, second to declare a 10 per cent dividend, and the third to appoint a receiver, the dividend declared when its liabilities exceeded its assets, and largely with borrowed money: Held, the directors are individually liable in damages to creditors of the corporation thus managed, whether the directors had actual knowledge of the insolvent condition or not, by reason of their negligence, fraud, or deceit.
    2. Same — Good Faith.
    Good faith alone will not relieve the directors of a corporation from liability to its creditors for damages caused them by their gross mismanagement and neglect of its affairs.
    3. Partnership — Principal and Agent — Corporations—Gross Mismanagement —Directors—Imputed Knowledge — Actual Knowledge — Burden of Proof,
    The knowledge of one partner which will be imputed to the others of the partnership must have been acquired within the agency implied from the partnership relation; and where the partnership sells goods to an insolvent and grossly mismanaged corporation, in which one of them is a director, the knowledge of the corporate affairs will not be imputed to the other; and where, after a receiver has been appointed for the corporation, the director therein assigns his claim to his partner upon a sufficient consideration, the other may recover from the individual directors his proportionate share of the debt. Under the evidence in this case the burden of proof is on the plaintiff to show the want of actual knowledge and that he acted in good faith.
    Hoke, J., dissenting; Allen, J., concurring in dissent.
    Civil actioN tried at May Term, 1915, of Pitt, before Whedbee, J.
    
    At tbe conclusion of tbe evidence tbe court sustained tbe motion to\ nonsuit. Tbe plaintiff excepted and appealed.
    
      
      Harry Skinner and Albion Dunn for plaintiff.
    
    
      Harding & Pearce, F. M. Wooten, Ward & Grimes for defendants.
    
   Beoww, J.

This action is brought to recover from the defendants, directors of the corporation known as the Central Mercantile Company, damages for negligence in the management of the affairs of the corporation, and against the defendant Wooten, president of the corporation, for willful misrepresentation as to its solvency, upon the faith of which plaintiff alleges he sold a bill of goods to the company.

■ - The evidence tends to prove that the corporation was organized in 1909 with these defendants as directors, or those that were not directors then, became so shortly after; that a finance committee was elected by the directors, composed of five members, which were paid for their services, and to that committee was largely entrusted, the management of the company’s affairs. The evidence shows that one J. F. Davenport was general manager and that he practically and almost exclusively ran the business. The directors, from the time the company was organized in 1909 until it became insolvent and went into the hands of' a receiver, in January, 1911, met three times only; the first to organize, the second to declare a dividend of 10 per cent, and the third to have a receiver appointed. The finance committee met weekly, but made no investigations of the company’s affairs, and always approved the report of the manager. When the dividend of 10 per cent was declared, in 1910, the liabilities of the company then largely exceeded its assets,. and the money with which the dividend was paid, or the most of it, was largely borrowed.

It is useless to recapitulate all the evidence as to the mismanagement of the affairs of the corporation. A cursory reading of the record discloses it. The evidence tends to prove that at a time when this condition of affairs existed, the defendant Wooten represented to the plaintiff that the corporation was solvent, and upon that representation the plaintiff, being a member of the firm of Hooker & Anthony, sold the goods to the corporation. The account for these goods after the appointment of a receiver for the corporation was assigned by T. N. Hooker to' the plaintiff. The evidence of negligence upon the part of the defendants, including Hooker, who was also a director, is too strong to need discussion.

It is immaterial whether the defendants were cognizant of the insolvent condition of the company or not. The law charges them with actual knowledge of its financial condition, and holds them responsible for damages sustained by stockholders and creditors by reason of their negligence, fraud, or deceit. Pender v. Speight, 159 N. C., 616; Townsend v. Williams, 117 N. C., 330; Soloman v. Bates, 118 N. C., 315.

"While the directors are not liable for losses resulting from mistakes of judgment such as are excused in law. they are liable for losses resulting from gross mismanagement and neglect of the affairs of the corporation. Good faith alone will not excuse them when there is lack of the proper care, attention, and circumspection in the affairs of the corporation which is exacted of them as trustees.

We are persuaded that the learned judge could not have dismissed this action upon the ground that there is no evidence of negligence. It must be, as stated on the argument, that he was of opinion that, inasmuch as defendant Hooker, a director, was a copartner of plaintiff in the firm that sold the goods to the insolvent corporation, the plaintiff was fixed by reason of such partnership with whatever knowledge Hooker had or ought to have had of the corporation’s affairs. We cannot agree with that view. The negligence of the directors cannot be imputed to plaintiff solely because he was a copartner in business with one of them. There is no evidence whatever that at the time he sold the goods to the corporation the plaintiff had any knowledge of fits financial condition. As for that matter, it seems that Hooker himself, although a director and secretary to the board, had little knowledge of the true condition of the corporation that he was supposed to serve.

We do not gainsay the general rule resulting from the unity of a partnership, that notice to an acting partner of any matter relating to the partnership' affairs will operate as notice to the firm except in case of fraud. We do not dispute the established doctrine of the law that imputes to the principal and charges him with all notice or knowledge relating to the subject-matter of the agency which the agent acquires while acting as such agent and within the scope of his authority. But those principles, in our opinion, ought not to apply to this case.

It is only where the partner is acting within the scope of the partnership business and within his authority that notice to him is notice to his copartners. Knowledge obtained by a partner outside of the scope of the firm business is not imputed to his copartners. Gilmore on Partnership, p. 319.

Although the principle of agency applies to copartners, yet it is only when it can be seen that a partner is in fact acting as an agent of his copartners that he can bind them. This question is very fully discussed by the New York Court of Appeals in Bienenstock v. Ammidown, 155 N. Y., 47, and it is there held that “Notice or knowledge of one member of a partnership acquired in transactions outside of the partnership business conducted for his individual benefit is not constructively imputable to his copartners ánd imposes no implied liability upon them through the partnership relation.” See, also, Story on Partnership, p. 414. Analogous decisions are to be found in respect to tbe liability of a corporation for knowledge acquired by a director.

A director in a corporation is one of its. officers, a part of its governing body, yet it is well settled'that tbe mere fact that be bas knowledge of a fact does not charge tbe corporation witb notice. In order to charge tbe corporation witb notice, tbe director must have acquired tbe knowledge officially as a member of tbe board and in tbe course of business as director or for tbe purpose of being communicated by him to the board. Bank v. Savery, 82 N. Y., 291, and cases cited; Bank v. Carman, 37 N. Y., 320; Bank v. Norton, 1 Hill, 572.

This Court bas held tbat a corporation is not bound by tbe acts or chargeable witb tbe knowledge of one of its officers or agents in respect to a transaction in which such officer or agent is acting in bis own behalf and does not act in any official or representative capacity. Bank v. Burgwyn, 110 N. C., 267.

We have considered this case upon tbe theory tbat plaintiff' was entirely innocent of all knowledge of tbe corporation’s financial condition at tbe time be sold tbe goods to it. While tbe bad faith or negligence of plaintiff’s partner must not be imputed to’ him, it at least throws upon tbe plaintiff tbe burden of proving to tbe satisfaction of tbe jury tbat in this matter be acted in good faith and without actual knowledge of the affair’s of tbe corporation. Randall v. Knevals, 50 N. Y. Sup., 748.

Of course, tbe plaintiff, if be establishes tbe allegations of bis complaint, cannot recover as damages tbe entire amount of tbe account for goods sold and delivered. He can only recover such damages as be bas personally sustained by reason of tbe negligence of tbe defendant. For these, damages bis copartner Hooker is as much liable as any other of tbe defendants upon tbe evidence set out in this record.

The judgment of nonsuit is set aside.

Error.

Hoke, J.,

dissenting: I am unable to concur witb tbe Court in tbe disposition made of this appeal, and believing tbat, by a misapplication of legal principles to tbe facts disclosed in tbe record, a grave injustice may be wrought to some, of the parties litigant, I consider it not improper that I should state briefly tbe reason for my dissent.

In giving the controlling grounds for its conclusion, tbe "ratio de-cidendi," the Court, in tbe close of tbe opinion, says: “We have considered this case upon tbe theory tbat plaintiff was entirely innocent of all knowledge of the corporation’s financial condition at tbe time be sold tbe goods to it. While tbe bad faith or negligence of plaintiff’s partner must not be imputed to him, it at least'throws upon the plaintiff tbe burden of proving to the satisfaction of the jury that in this matter he acted in good faith and without actual knowledge of the affairs of the corporation. Randall v. Knevals, 50 N. Y. Sup., 748.” And, to my mind, a casual perusal of the facts in evidence will show not only that plaintiff was not “entirely innocent of the corporation’s financial condition,” but that he is to be charged with full knowledge of it in so far as his right to recover on this account is concerned, and that these facts disclose further that the firm of Anthony & Hooker, in whose name and by whose right this account must be collected, if at all, did not extend its credit or make the account in reliance on anything that the defendants or either of them said about the corporation’s business, but acted entirely on their own estimate of conditions.

Recurring to the record, it appears that in 1909 and 1910 and early in 1911 plaintiff and-T. M. Hooker were copartners, doing a wholesale grocery business in the town of Greenville, N. C., and that during said period the Central Mercantile Company was a corporation doing a general supply business and having its store within two blocks of that of plaintiff; that the corporation had organized for its purpose in the latter part of 1908, and proceeded in the conduct of its business by electing nine directors, one of whom was plaintiff’s partner, T. M. Hooker, who was chosen' and served as secretary of the board; that these directors selected five of their number, styled a financial committee,. who had general supervision of the business of the corporation, and one of them, J. E. Davenport, was made active manager at a salary of $1,000, and was required to give bond in the sum of $5,000 for the faithful performance of his duties, and the bookkeeper was required to give such bond in like sum. That the business went on with apparent success through 1909, the financial committee meeting once a week to examine into the affairs and management, a custom that continued during the life of the corporation, and, having appointed one of their number, regarded as a skillful accountant, to make a thorough examination of the books, he reported that his investigations disclosed a profit for the year of 17 per cent. The directors thereupon declared a dividend of 10 per cent, which was paid. The corporation continued its business through 1910, when, having become financially embarrassed, on proceedings instituted, a receiver was appointed, who collected and distributed its assets according to law. There are no facts in evidence from which the exact financial condition of the corporation at the time of declaring this dividend can be determined, but it subsequently developed that the business of the corporation did not justify a dividend at the time, and that the directors and their accountants were misled by the fact that quite a number of invoices of goods, purchased and owed foi’, bad not been entered on tbe company’s books. That soon after tbe corporation commenced business tbe firm of Anthony & Hooker began selling it goods, and sold tbe company large quantities tbrougb 1909 and 1910, stated on tbe argument and uncontradicted, to amount to more tban $30,000, and, at tbe time of proceedings instituted and receiver appointed, there was a balance due tbe plaintiff’s firm of $2,272.50, reduced by dividend from receiver of $656.98, leaving a final balance of $1,615.52, for wbicb tbis suit is brought seeking recovery against tbe president of tbe company, John L. "Wooten, and tbe directors as individuals, for negligent management and fraudulent representations as to tbe company’s financial condition. That on or about July, 1910, tbe company began to be slow in their payments, plaintiff’s firm bolding against it several protested checks, when Anthony, tbe plaintiff, and Hooker, bis partner, conferring on tbe subject, Anthony suggested that Hooker should interview Wooten, tbe president, on tbe subject, and Anthony testifies that on coming from tbe interview Hooker reported to him that Wooten bad given assurances that tbe corporation was good for any amount that would be sold it, and, as a result of such report, further sales were made, leaving on final account tbe balance due as stated. That in 1913, two years after appointment of receiver, Hooker having declined or being disinclined to join in tbe suit against tbe president and fellow directors, Anthony took over tbis account and allowed Hooker, in payment therefor, two old claims of tbe firm, also supposed to be bad, and entered suit, claming that be was uninformed of tbe business conditions and methods of tbe corporation and was induced to make these last sales by tbe assurances bad from Wooten as reported to him by bis partner, Hooker. There is no claim or suggestion that Hooker was endeavoring to circumvent Anthony in the matter. So far as tbe record shows, Anthony and Hooker are still friendly and doing business together, having become incorporated in January, 1911. Hooker himself testifies, among other things, that be acted as secretary of tbe board of directors, and tbe book containing tbe minutes of tbe meetings were kept in tbe safe of Anthony & Hooker. That he went into tbe supply store of tbe company almost every day, and ■ occasionally examined their books and noted that they were not very well kept. That, as a member of tbe firm of Anthony & Hooker, be at first sought tbe business of tbe corporation, but when they became slow pay be and Anthony bad a conference about it, and, as a result, Hooker interviewed Wooten, who told him “that tbe stockholders might lose something, but be did not see bow the creditors could,” and that-be, thereupon, continued to make sales till or near tbe time tbe proceedings were instituted. That witness passed tbe place of business of tbe company very often, at1 least once every day; tbat there was no effort made to prevent witness from learning tbe conditions surrounding- tbe business of tbe corporation, and tbat, while it turned out tbat be did not have a full knowledge of such business, be made these sales on bis own judgment, and that neither Wooten nor any of tbe other defendants were responsible for tbe giving of such credit, and tbat be bad never concealed from Anthony, bis partner, any of tbe facts. It further appeared tbat J. S. Wooten and bis codefendants, other than Davenport, tbe manager, were men engaged in other business in tbe town, and tbat tbe activé management of tbe company was, as stated, entrusted to J. S. Davenport, and be was under tbe supervision of tbe finance committee and acted under bond reasonably sufficient to insure the proper performance of bis duties.

From this, a fair summary of tbe facts in evidence, I am of opinion tbat there is very little, if any, testimony to fix personal responsibility on tbe president and directors, and tbat any suit proceeding on tbe theory tbat plaintiff Anthony was entirely innocent of all knowledge of tbe corporation’s methods and financial condition cannot for a moment be entertained. Even if be was not sufficiently put on guard by tbe slow pay of tbe company and tbe protest of several of its checks held by bis firm when this account was made, bis associate and partner was one of tbe corporate directors and secretary of tbe board, kept tbe book containing its minutes in tbe firm’s safe, and knew as much or more about its affairs than tbe defendants, except Davenport, who was tbe active manager. He testifies, further, tbat be was in tbe corporation’s store at least once every day, and occasionally examined its books, and tbat nothing was done to prevent him from looking fully into tbe company’s affairs, and tbat be kept nothing back from bis associate, Anthony. Under these circumstances, tbe knowledge possessed or acquired by Hooker was the knowledge of bis firm, and Anthony, who is seeking to enforce collection of a firm debt, cannot be beard to say tbat tbe firm was entirely without notice or knowledge of conditions. In Lindley on Partnership, sec. 142, it is said: “In conformity with these principles, if a firm claims tbe benefit of a transaction entered into by one of its members, it cannot effectually set up its own ignorance of what tbat member knew, so as to be in a better position than be himself would have been in bad be been dealing on bis own account as a principal.” And in George on Partnerships, p. 234: “As a general rule, notice to a principal is notice to all bis agents, and notice to an agent of matters connected with bis agency is notice to bis principal. Consequently, as a general rule, notice to one partner of any matter relating to tbe business of tbe firm is notice to all the other members; and if two firms have a common partner, notice wbicb is imputable to one of tbe firms is imputable to tbe other also, if it relates to tbe business of that other. In conformity with these principles, if a firm claims tbe benefit of a transaction entered into by one of its members, it cannot effectually set up its own ignorance of what that.member knew, so as to be in a better position than be himself would have been in bad lie-been'dealing on bis own account as a principal.” And Gilmore on Partnerships, p. 318, and Bates on Partnership, sec. 398, are to like effect. It is contended that knowledge of one partner that comes to him outside of tbe course and scope of bis business is not always and necessarily imputed to bis copartners, citing, among other cases, Bank v. Burgwyn, 110 N. C., 272. The case of Bank v. Burgwyn was that of an incorporated company, a separate entity,- and tbe principle of imputed notice is not so insistent as in case of a partnership; but, conceding that the principle applies though in lesser degree to a partnership, this knowledge of Hooker came to him in the direct course and scope of his business. He was expressly commissioned to look into the company’s affairs, and the firm acted on his judgment. It is no matter of surprise, therefore, that Hooker, conscious of the lack of merit in his claim, should be disinclined to join in any such suit as this, and the courts should not countenance it when entered by plaintiff, who took it over with full knowledge of conditions and paid for it with other bad debts of the firm. Again, it is well understood that for a recovery of this kind there should not only be a false representation, but that the claimant should have relied on it. Tarault v. Seip, 158 N. C., 363; May v. Loomis, 140 N. C., 350. There is, as stated, no claim or suggestion that Hooker endeavored to mislead or impose on Anthony in any way, and Hooker swears that, in making these sales, he acted on his own judgment and not on the representations of defendant Wooten or of any one else connected with the company. He testified, further, that when he interviewed Wooten, which he did after he and his partner Anthony had conferred about it, all that Wooten told him was that he did not see how creditors could lose anything. Anthony does not give any direct evidence in contradiction of this. True, he swears that his-own partner, Hooker, told him more than this; but if he was misled, it was his own partner that did it. I think there is no aspect of this evidence that would justify a recovery, and that the judgment of nonsuit should be sustained, first, because there is very little, if any, evidence of negligence which justifies fixing the individual responsibility contended for; second, if it is otherwise, that plaintiff Anthony, if not sufficiently put on guard by the slow pay of the company and the protest of several checks given by the corporation to his firm, is charged witb notice and knowledge of the corporation’s methods and financial condition by the knowledge acquired and possessed by his copartner, Hooker; third, because there is no direct evidence that the goods were sold in reliance on any representations made by defendants or either of them, but that Hooker, who had the matter in charge for the firm, acted on his own judgment in making the sales which constitutes the present account and which is now sued for.

Allen, J., concurring in dissenting opinion.  