however, is not liable for losses occasioned by the misconduct of co-directors when he is without fault.79 Directors are not liable for losses due to dishonesty of officers or employees unless such directors have failed to exercise reasonable care in the selection of the employees or have retained dishonest officers or employees, after their dishonesty was known.80 If the directors or officers of an association misappropriate its funds or engage in other fraudulent conduct that results in losses, their action cannot be condoned; that is, ratified, "except by the unanimous consent of the stockholders; otherwise a majority, or a director who might control a majority vote in a corporation, would be able to rob and despoil it with impunity.”81 If it is claimed that the members of an association have ratified transactions of its directors or officers, it must be shown that the members were advised of all the material facts; because, without knowledge of such facts, there could be no ratification.82 Primarily, the right to bring suit against directors for an accounting, or to annul a contract voidable because a director had an unlawful personal interest is in the corporation, or in its receiver if the corporation is in the hands of a receiver. Members of the corporation may sue the directors under such circumstances if the directors then in control of the association are themselves the wrongdoers, as it would be folly to expect directors to institute and properly conduct a suit against themselves.83 The general rule is that no other persons can institute such suits. It has been held that farmers who were eligible for membership in a rural electric cooperative, but who were not members, had no legal standing to object to action taken by its board of directors, since the legal rights of these farmers were not affected thereby.84 79 Fisher v. Graves, 80 F. 590 (S.D.N.Y. 1897). 80 Bates v. Dresser, 251 U.S. 524 (1920). 81 Ford v. Ford Roofing Products Co., 285 S.W. 538, 541 (Mo. App. 1926). See also Monterey Water Company v. Voorhees, 45 Ariz. 338, 43 P. 2d 196 (1935). 82 Mallory v. Mallory-Wheeler Co., 61 Conn. 131, 23 A. 708 (1891); Lindeke v. Scott County Cooperative Company, 126 Minn. 464, 148 N. W. 459 (1914). 83 Browne v. Hammett, 133 S.C. 446, 131 S.E. 612 (1926); Morton v. Morton Realty Co., 41 Idaho 729, 241 P. 1014 (1925); Rural Credit Subscribers' Association v. Jett, 205 Ky. 604, 266 S. W. 240 (1924); Loftus v. Farmers' Shipping Association, 8 S.D. 201, 65 N. W. 1076 (1896); Pencille v. State Farmers' Mutual Hail Insurance Company, 74 Minn. 67, 76 N. W. 1026, 73 Am. St. Rep. 326 (1898). 84 Bailey v. Carolina Power & Light Company, 212 N.C. 768, 195 S.E. 64 (1938). Cf. Meyers v. Lux, 75 N. W. 2d 533 (S.D. 1956). Can directors of an association ever be liable personally to others? If directors cause or are responsible for the association's violation of the legal rights of others-for instance, by the misapplication of funds,85 by fraud, tresspass, coercion, or deceit they are personally liable to such persons.8% The fact that the association may also be liable does not alter the situation. The doctrine is simply an application of the general rule that agents are liable to third persons for any invasion of their legal rights, regardless of the liability of their principals. The liability of directors who sign the notes of an association is discussed under the heading "Promissory Notes" at page 326. While the board of directors of a cooperative is normally vested with full authority to conduct and manage the business of the association, in some States statutes have been enacted requiring consent of the members or stockholders to certain corporate acts. For instance, the consent of a certain percentage of the members or stockholders to the giving of a mortgage on substantially all the property of an association is required in some States.87 Likewise, in certain States there may not be a sale of all the assets of a corporation unless authorized or approved by a vote of the holders of a prescribed percentage of the outstanding shares of capital stock.88 Statutes of this kind have been held applicable to mortgages.89 In an Ohio case in which an association began operations before the required amount of stock had been subscribed, the directors were held liable as partners.90 85 Cone v. United Fruit Growers' Association, 171 N.C. 530, 88 S.E. 860 (1916). See also Lewis v. Council, 291 F. 148 (E.D.N.C. 1923); Dome Realty Co. v. Rottenberg, 285 Mass. 324, 189 N.E. 70 (1934). 86 Frontier Milling & Elevator Co. v. Ray White Co-op Mercantile Co., 25 Idaho 478, 138 P. 825 (1914); Springman Paper Products Co. v. Detroit Ignition Co., 236 Mich. 90, 210 N. W. 222 (1926); Scott v. Shook, 80 Colo. 40, 249 P. 259, 47 A.L.R. 1108 (1926); Houston v. Thornton, 122 N.C. 365, 29 S. E. 827, 65 Am. St. Rep. 699 (1898). 87 Shapiro v. Peoples Cooperative Society, 125 Misc. 839, 211 N.Y.S. 468 (1924); 19 C.J.S. 654. See also Warren Rural Electric Cooperative Association v. Harrison, 312 Ky. 702, 229 S. W. 2d 473 (1950). 88 Michigan Wolverine Student Cooperative, Inc. v. Wm. Goodyear & Co., 314 Mich. 590, 22 N. W. 2d 884 (1946). 89 Clark v. Pargeter, 142 Kan. 781, 52 P. 2d 617 (1935); McDonald v. First National Bank of Attleboro, 70 F. 2d 69 (1st Cir. 1934). 90 Farmers' Cooperative Trust Company v. Floyd, 47 Ohio St. 525, 26 N.E. 110, 12 L.R.A. 346 (1890). A cooperative statute of Indiana contains a provision: In the absence of a provision in the bylaws fixing the Directors of a cooperative could, under certain circumstances, be held liable for losses arising from a violation of this statutory provision. Additional Liabilities Imposed The discussion so far has been based upon the common law, that is, the rule applicable independent of any statutes. But do the State constitutions and statutes impose duties and liabilities upon directors of cooperatives in common with other corporate directors? Yes; many, if not all, of the States have provisions in their statutes or constitutions which impose duties and liabilities upon the directors 92 or officers of corporations, or both.93 Generally speaking, these provisions are applicable to the directors and officers of cooperatives. As illustrating the liability under statutes of the directors of cooperatives, in a Montana case, directors of a cooperative were held liable to creditors because they failed to file a report showing the condition of the association as required by a Montana statute.94 Directors of cooperatives should ascertain the duties and liabilities imposed upon them by State constitutions and statutes and should govern their actions accordingly. Ordinarily, it is not 91Ind. Stats. Ann. § 15-1611(m), as amended in 1971. Acts 1971, P.L. 201. 92 Farmers' Cooperative Trust Company v. Floyd, 47 Ohio St. 525, 26 N.E. 110, 12 L.R.A. 346 (1890). 93 Rice v. Madelia Farmers' Warehouse Co., 87 Minn. 398, 92 N. W. 225 (1902). 94 Anderson v. Equity Co-op Association, 67 Mont. 291, 215 P. 802 (1923); Githers v. Clarke, 158 Pa. 616, 28 A. 232 (1893). sufficient simply to examine the cooperative statutes of the State, since the general statutes of the State relative to directors may also apply. Under many of the corporation statutes, the directors of a corporation at the time of its dissolution are trustees for its creditors.95 Executive Committee Although the laws generally provide that the business of an association shall be conducted, managed, and controlled by a board of directors, many cooperatives provide for an executive committee to function with respect to certain aspects of their affairs. The general rule is that the board of directors of a corporation may delegate ministerial matters to an executive committee, but generally a board of directors may not delegate its own discretionary power.96 In a few States, directors have the power without statutory authority to delegate to officers, agents, or executive committees the power to transact not only ordinary and routine business but business requiring the highest degree of judgment and discretion.97 But the rule just stated is not the general one. In all States, after the board of directors of an association has determined upon a certain policy or course, it may have such policy or course carried out by an executive committee or by any other means deemed advisable. The initiation of fundamental policies, however, should be by the board of directors. Many of the cooperative statutes deal expressly with the matter of executive committees, and such statutory provisions should be followed.98 The general rules pertaining to boards of directors, such as those concerning quorums, apply to executive committees. 95 Kansas Wheat Growers' Association v. Markley, 132 Kan. 156, 294 P. 885 (1931). 96 Ames v. Goldfield Merger Mines Co., 227 F. 292 (D. Wash. 1915). See Griffin, Hulbert, and Volkin, Director Committees of Farmer Cooperatives, FCS General Report 85, Farmer Cooperative Service, U.S. Dept. Agr. (1960). 97 Jones v. Williams, 139 Mo. 1, 39 S. W. 486, 40 S. W. 353, 61 Am. St. Rep. 436, 37 L.R.A. 682 (1897); Haldeman v. Haldeman, 176 Ky. 635, 197 S. W. 376 (1917). See also United States v. Union Pacific Railroad Company, 226 U. S. 470 (1913). 98 The 1966 Kentucky statute reads: "The bylaws may provide for an executive committee and may allot to it all the functions and powers of the board, subject to the general direction and control of the board." KRS 272.171(6). Minutes of Meetings The minutes of meetings of the board of directors should tell the story of the board's actions on association business. Likewise, the minutes of meetings of association members should recount the action they have taken. Although generally, from a strictly legal standpoint, it is not necessary that minutes of meetings of an association or of its board of directors be kept, it is highly important that this be done. Thus, in the absence of charter or statutory provisions, it is not necessary that the acts of an association, its officers, or its board of directors be evidenced by any writing or record not necessary in the case of an individual. If no minutes are made of the action of the board of directors, oral testimony has been held admissible to show the action taken in the event a question on this point should arise in the course of a lawsuit.99 The minutes of a meeting should show the date and hour when it was held. There is a serious question whether action taken by a board of directors at a meeting outside the State in which the corporation was incorporated is legally binding on third persons and the corporation in the absence of a statutory or charter provision authorizing the same. 100 The statutes of many States expressly authorize the holding of board meetings outside the State of incorporation. The action taken by directors at a meeting of the board should be recorded in the minutes of the board. Likewise, the action taken by members of an association in their meetings should be recorded in the minutes of the association. The directors possess all the corporate powers of the cooperative not specifically reserved to the members. The directors should direct and manage the affairs of the cooperative within the scope of the powers conferred by the charter, subject to any restrictions contained in the bylaws or marketing contracts. The cooperative's officers and employees execute the orders or carry out the policies fixed by the board of directors. 99 Robson v. C.E. Fenniman Co., 83 N.J. Law 453, 85 A. 356 (1912); Whitlock v. Alexander, 160 N.C. 465, 76 S.E. 538 (1912); Hughes Mfg. & Lumber Co. v. Wilcox, 13 Cal. App. 22, 108 P. 871 (1910); Iowa Drug Co. v. Souers, 139 lowa 72, 117 N.W. 300, 19 L.R.A. (N.S.) 115 (1908); Traxler v. Minneapolis Cedar & Lumber Co., 128 Minn. 295, 150 N. W. 914 (1915). 100 Ballantine's Manual of Corporation Law and Practice, sec. 168; 5 Fletcher, Cyc. Corp. (Perm. Ed.) § 2003. |