Hutchison v. Rock Hill Real Estate & Loan Co.

December 13, 1902. The opinion of the Court was delivered by The facts of this case are fully set out in the report of the special referee, which was confirmed by a formal order of the Circuit Court. It will be incorporated in the report of the case. In order to understand clearly the question at issue, it will be necessary to refer to the pleadings which are stated in said report. This action was brought, not by creditors, but by a stockholder on behalf of herself and other stockholders, to have the transfers made in pursuance of the resolutions mentioned in the complaint, declared null and void. The defendants appealed upon exceptions, which will be set out in the report of the case, but it will not be necessary to consider them in detail, as the practical questions presented by them are:

1. Did the board of directors of The Rock Hill Real Estate and Loan Company have the power to enter into the agreements mentioned in the resolution purporting to have been adopted by said board?

2. Was the action of R. Lee Kerr, secretary and treasurer of said corporation, binding upon it, even admitting that the resolutions were not authorized by the board of directors?

3. Was the action of the board of directors in acquiescing in the conduct of R. Lee Kerr, secretary and treasurer, a fraud upon the rights of the other stockholders?

4. Were the defendants bona fide holders of the property transferred to them in pursuance of the said resolutions?

We will first consider whether the board of directors of The Rock Hill Real Estate and Loan Company had the power to enter into the said agreements. The Rock Hill Real Estate and Loan Company was chartered by a special act of the legislature in 1888 — 20 Stat., 248 — by which, as stated by the special referee, it was authorized and empowered to loan and borrow money for the benefit of its members and stockholders, and to sell, alien, convey, or mortgage or otherwise dispose of its property, as it might deem expedient, subject to such regulations as might be prescribed by the rules and by-laws of said corporation. The special referee states that under the by-laws of said corporation it is provided that "the business of this corporation shall be under the care, management and control of a board of directors." Under the foregoing provisions of the act and the by-laws of the corporation, the board of directors unquestionably had the power to enter into said agreements.

We will next consider whether the action of R. Lee Kerr, secretary and treasurer, was binding upon the corporation, even admitting that the resolutions were not authorized by the board of directors. At the foot of the resolution marked "B," is the following certificate: "I, R. Lee Kerr, secretary of The Rock Hill Real Estate and Loan Company, do hereby certify that the above is a true copy of the resolution adopted by the board of directors of The Rock Hill Real Estate and Loan Company, at a meeting held on date above written, and that the same has been duly enrolled in the minute books of the said company on pages 20 and 21. Rock Hill, S.C. Dec. 5th, 1899. R. Lee Kerr, secretary." The certificate at the bottom of the other resolution is substantially the same as the foregoing. In his report the special referee says: "I think it is a plain inference from the testimony, that the directors permitted R. Lee Kerr to have absolute control over the assets of the defendant corporation, and that he managed these assets as it suited his convenience and for whatever purpose he wished; for from his own testimony in borrowing money he called on the directors only on three occasions." Furthermore, the board of directors acquiesced in the action of R. Lee Kerr, as shown by the allegations of the complaint. The signing of the certificates was within the scope of his employment, and, therefore, even if they were unauthorized and fraudulent on the part of R. Lee Kerr, his action was nevertheless binding upon the corporation.Reynolds v. Witte, 13 S.C. 5. In the case just mentioned, the Court quotes with approval the following language from sec. 452 of Story on Agency: "It is a general doctrine of law, that although the principal is not ordinarily liable (for he sometimes is) in a criminal suit for the acts or misdeeds of his agent, unless, indeed, he has authorized or co-operated in them, yet he is held liable to third persons in a civil suit for the frauds, deceits, concealments, misrepresentations, negligence and other malfeasances and omissions of duty of his agent in the course of his employment, although the principal did not authorize or justify or participate in, or, indeed, know of such misconduct, or even if he forbade the acts or disapproved of them. In all such cases the rule appliesrespondeat superior; and it is founded upon public policy and covenience, for in no other way could there be any safety to third persons in their dealings, either directly with the principal, or indirectly with him through the instrumentality of agents. In every such case the principal holds out his agent as competent and fit to be trusted, and thereby, in effect, he warrants his fidelity and good conduct in all matters within the scope of the agency." In stating the reason for this rule, Lord C.J. Holt says: "Seeing that some one must be loser by the deceit, it is more reasonable that he who employs and confides in the deceiver should be the loser than a stranger." This principle is also fully supported by numerous authorities cited in the argument of appellant's attorneys. We are, therefore, of the opinion that the conduct of R. Lee Kerr, secretary and treasurer, was not only binding on the corporation by reason of its ratification by the board of directors, but likewise because the signing of the certificates was within the scope of his employment.

We will next consider whether the action of the board of directors in acquiescing in the conduct of R. Lee Kerr, secretary and treasurer, was a fraud upon the rights of the other stockholders. It cannot for a moment be contended that the ratification by the board of directors of R. Lee Kerr's conduct and the refusal by said board to institute legal proceedings to set aside said transfers, constituted fraud upon the rights of other stockholders, unless the board had notice of such facts as might reasonably be expected to furnish the basis for a successful attack upon said transfers.

We have shown that the fact that the action of R. Lee Kerr was unauthorized, did not prevent it from binding the corporation, as it was within the scope of his employment. The only other ground under the pleadings upon which the board could have instituted proceedings to set aside the transfers, was that the defendants were not bona fide holders of the property assigned in pursuance of the resolutions, and this brings us to the question whether they were bona fide holders of such property, which we will next consider. It might well be contended, under the doctrine announced in Levister v. Ry. Co., 56 S.C. 508, 35 S.E.R., 207; Riggs v. Association, 61 S.C. 448, 39 S.E. R., 614; and Thompson v. Insurance Co., 63 S.C. 290; that the stockholders are not in a position to raise the question of fraud, as they have not offered to return the benefits which they derived from the transactions hereinbefore mentioned. This Court, however, does not find it necessary to apply that doctrine in this case. The law is well settled in this State, that even if there was fraud upon the part of R. Lee Kerr, it did not affect the rights of the defendants unless they had notice of such fraud — McElwee v. Kennedy, 56 S.C. 170, 34 S.E.R., 86. Although the testimony shows that the directors permitted R. Lee Kerr to have absolute control over the assets of the corporation, and that he managed these assets as suited his convenience and for whatever purpose he wished, nevertheless, out of caution, Kerr was specially instructed by the officers of the bank and by the attorney for Haines Bishop to call a meeting of the directors for the purpose of passing said resolutions, thus showing good faith. The value of the choses in action sold by the defendants was determined and agreed upon after calculations on both sides. In so far as it contended that certain directors were personally benefited by said transactions, it must be remembered that the claims upon which they were liable were not paid with funds belonging to The Rock Hill Real Estate and Loan Company, but that they were only assigned to it. The liability of the directors was not thereby diminished, but there was only a difference as to the holders of the claims. Furthermore, it cannot be said that the directors fraudulently entered into said transactions, for the complaint shows they took place without their knowledge. The testimony fails to sustain the allegations of the complaint that the defendants are not bona fide holders.

The respondents gave notice that they would move the Court on the additional ground "that the alleged resolutions of the board of directors of The Rock Hill Real Estate Loan Company, of December 5th, 1899, and of March 2d 1900, if they were adopted, and the alleged transfers of assets pursuant thereto, in effect, constitute chattel mortgages, which said board was powerless to authorize without the consent of the stockholders." For the reasons hereinbefore stated, this ground cannot be sustained.

It is the judgment of this Court, that the judgment of the Circuit Court be reversed.