Lillian Knitting Mills Co. v. Earle

74 S.E.2d 351 (1953) 237 N.C. 97

LILLIAN KNITTING MILLS CO.
v.
EARLE et al.

No. 601.

Supreme Court of North Carolina.

January 30, 1953.

G. T. Carswell, Charles W. Bundy and Richard M. Welling, Charlotte, for defendants, appellants.

R. L. Smith & Son, Albemarle, for plaintiff, appellee.

DENNY, Justice (after stating the case).

The defendants assign as error the failure of the trial judge to sustain their motion for judgment as of nonsuit interposed at the close of the plaintiff's evidence, while the appellee relies solely on the case of Solomon v. Bates, 118 N.C. 311, 24 S.E. 478, 481, and the principles of law applied therein with respect to the liability of bank directors, to sustain the verdict below.

In the case of Solomon v. Bates, supra, this Court, prior to the adoption of our comprehensive laws regulating banks, said, "Where the object of the suit is to charge the directors with liability for a breach of trust, the rule is well settled that relief may be had against any or all those who concurred in the wrong, the tort being treated as several as well as joint. * * * it is quite well settled that an action can be brought against the directors by the depositors and other creditors for damages caused by their gross mismanagement, neglect, and false representations, and this without first applying to the corporation itself, or to the receiver to bring such action * * *. But, both as to third parties and stockholders alike, it is a good cause of action against directors that they declare the dividend, as in this case, out of the capital stock or deposits of the bank, and not out of its earnings * * *; and also that they caused false reports to be published by the directors of the condition of the bank. * * * it is not necessary that the directors should know that such reports are false; it is their duty to know that they are true."

The general rule with respect to the liability of bank directors is not altogether applicable to officers and directors of a private corporation. It is said in 7 Am.Jur., Banks, section 316, page 227 et seq., "It is now settled that the directors of a bank are personally liable, at the suit of a depositor, for damages sustained by reason of the insolvency of the corporation when the depositor is induced to place money in the bank solely by false representations of solvency made to the general public by the directors, who ought to have known, and who, by the use of ordinary care, such as it was their duty to have exercised, might have known, that such representations were false. A false report of the condition of the bank made by the directors of a state bank to officials to whom such report is required to be furnished or a false advertisement published concerning the condition of the bank may give rise to an action against them in favor of persons making the deposits upon reliance of such a report or advertisement." This same authority, 13 Am.Jur., Corporations, section 1088, page 1020, states: "The cases are agreed that a director or officer of a corporation is not liable, merely because of his official character, for the fraud or false representations of the other officers or agents of the corporation or for fraud attributable to the corporation itself, if such director or officer is not personally connected with the wrong and does not participate in it."

The law as stated by the above authority was applied by this Court in Harper v. Oak Ridge Supply Co., 184 N.C. 204, 114 S.E. 173, and the verdict sustained against all the directors of the defendant corporation where they had actually participated in the perpetration of the fraud. And also in Palomino Mills v. Davidson Mills Corp., 230 N.C. 286, 52 S.E.2d 915, where the president of the corporation had signed a bill of sale in which the items listed were at variance with the actual inventory of the merchandise supposed to be transferred thereby. See also Brite v. Penny, 157 N. C. 110, 72 S.E. 964.

Moreover, it is provided by G.S. § 55-56, that in case of fraud by the officers, directors, managers, or stockholders of a corporation, "the court shall adjudge personally liable to creditors and others injured thereby the officers, directors, managers, and stockholders who were concerned in the fraud."

In this case there is no evidence to support the allegations in the complaint to the effect that Mrs. Mary B. Earle and Sam Houston participated in the negotiations that led to the establishment of a line of credit with the plaintiff. Or that they or either of them assured its officials thereafter that the Hosiery Corporation was solvent. Neither is there any evidence that they participated in the preparation of the financial statement furnished to the plaintiff or that they knew of its existence. There is no evidence on this record that Mrs. Mary B. Earle or Sam Houston ever communicated with any representative or official of the plaintiff at any time before or after 7 January, 1949.

Furthermore, the plaintiff's allegations as to fraud with respect to the conveyance of the N. Davidson Street property are not supported by the evidence. In fact, no loss to the Hosiery Corporation is established as a result of the transaction in connection therewith. According to the evidence, three separate appraisals were made of this property at the request of the receiver and Mr. Hemphill, the certified public accountant, but nowhere in the record is it revealed whether the appraisals were greater or less than the amount shown in the financial statement furnished the plaintiff, or the actual amount the Hosiery Corporation received therefor. The evidence also reveals that the Lexington Avenue property was transferred 1 May, 1948 and not in April, 1949 as alleged in the complaint. It is further disclosed by the record that this property was not listed as an asset of the Hosiery Corporation in the financial statement as of 30 September, 1948 and furnished to the plaintiff on 7 January, 1949. However, since the plaintiff alleged in its complaint that the transfer of this property was made in April, 1949 for the purpose of cheating and defrauding the plaintiff, it was error to refuse to permit the receiver of the Hosiery Corporation to testify as to the status of the property at the time of the trial.

What are the facts with respect to T. B. Earle? Has the plaintiff established those essential elements of actionable fraud or deceit necessary to a recovery against him? We do not think so.

"The essential elements of actionable fraud or deceit are the representation, its falsity, scienter, deception, and injury. The representation must be definite and specific; it must be materially false; it must be made with knowledge of its falsity or in culpable ignorance of its truth; it must be made with fraudulent intent; it must be reasonably relied on by the other party; and he must be deceived and caused to suffer loss." Leggett Electric Co. v. Morrison, 194 N.C. 316, 139 S.E. 455; Berwer v. Union Central Life Insurance Co., 214 N.C. 554, 200 S.E. 1; Hill v. Snider, 217 N.C. 437, 8 S.E.2d 202; 37 CJ.S., Fraud, § 3, page 215.

The plaintiff alleges that on 7 January, 1949 when the defendants established credit with the plaintiff for the Hosiery Corporation, they represented to the plaintiff that they would keep it advised as to any change in the financial status of the Hosiery Corporation; that they continuously thereafter repeated to the plaintiff that the Hosiery Corporation was in good financial condition and amply solvent. No evidence whatever was offered in support of these allegations.

The plaintiff also alleges that in furtherance of defendants' plan to obtain credit from it, they furnished certain financial statements to Dun & Bradstreet in the years 1946, 1947, and 1948 in which the value of the inventories are overstated. The defendants admit in their answer that certain financial statements were furnished to Dun & Bradstreet but they deny that they knowingly or wilfully misrepresented the net worth of the Hosiery Corporation. Conceding that Mr. Earle's statement with respect to the financial reports furnished to Dun & Bradstreet constitutes evidence of a fraudulent practice, there is no evidence that these reports played any part in the establishment of credit with the plaintiff. In fact, the evidence is to the effect that the information with respect to these statements was not obtained until Mr. Hemphill, the certified public accountant, was making his audit for the creditors of the Hosiery Corporation in September, 1949. Moreover, Mr. Patterson, the treasurer and general manager of the plaintiff, testified that he relied on the financial statement (as of 30 September, 1948) and Mr. Earle's representations to him as president of the Hosiery Corporation in extending them credit.

It is alleged in the complaint that the amount of $72,543.54 designated in the financial statement furnished the plaintiff as "Inventories, Merchandise & Material," was grossly in excess of the true value. However, no evidence was offered in support of this allegation.

It is further alleged in the complaint that the assets of the Hosiery Corporation turned over to its receiver are practically of no value. The plaintiff offered no evidence in support of this allegation. The value of the assets turned over to the receiver by the Hosiery Corporation, the amount of the claims against the corporation filed with the receiver, and whether the Hosiery Corporation is solvent or insolvent cannot be ascertained from the evidence offered in the trial below.

A creditor of a corporation in order to recover his claim against an officer or director of a corporation for fraud or deceit, must show more than an unpaid claim against the corporation. The creditor must establish an actual loss flowing from the fraudulent misrepresentations of such officer or director. "Fraud without damage or damage without fraud is not actionable; but, where both concur, an action lies." 37 C.J.S., Fraud, § 3, page 215.

We do not think the evidence adduced in the trial below is sufficient to support a verdict for fraud or deceit. Hence, the failure of the court below to sustain the defendants' motion for judgment as of nonsuit is reversed.

Reversed.

PARKER, J., took no part in the consideration or decision of this case.