would be folly to expect directors to institute and properly conduct a suit against themselves.30 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 association but who were not members thereof, 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.31

32

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, by fraud, trespass, coercion, or deceit-they are personally liable to such persons; 33 and 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" (see p. 232).

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.34 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. Statutes of this kind have been held applicable to mortgages.35

30 Browne v. Hammett, 133 S. C. 446, 131 S. E. 612; Morton v. Morton Realty Co.. 41 Idaho 729, 241 P. 1014; Rural Credit Subscribers' Association v. Jett, 205 Ky. 604, 266 S. W. 240; Loftus v. Farmers' Shipping Association, 8 S. D. 201, 65 N. W. 1076; Pencille v. State Farmers Mutual Hail Insurance Company, 74 Minn. 67, 76 N. W. 1026, 73 Am. St. Rep. 326.

31

Bailey v. Carolina Power & Light Company, 212 N. C. 768, 195 S. E. 64. 32 Cone v. United Fruit Growers Association, 171 N. C. 530, 88 S. E. 860. See also Lewis v. Council, 291 F. 148; Dome Realty Company v. Rottenberg, 285 Mass. 324, 189 N. E. 70.

33 Frontier Milling & Elevator Co. v. Roy White Co-op. Mercantile Co., 25 Idaho 478, 138 P. 825; Springman Paper Products Co. v. Detroit Ignition Co., 236 Mich. 90, 210 N. W. 222; Scott v. Shook, 80 Colo. 40, 249 P. 259; Houston v. Thornton. 122 N. C. 365, 29 S. E. 827, 65 Am. St. Rep. 699.

34

Shapiro v. Peoples Co-operative Society, Inc., 125 Misc. 839, 211 N. Y. S. 468; 19 C. J. S. 654.

35

Clark v. Pargeter, 142 Kan. 781, 52 P. 2d 617; McDonald v. First National Bank of Attleboro, 70 F. 2d 69.

In some States there are statutory provisions that, under certain conditions, the board of directors of an association must refer to the membership any matter upon which it has acted. For instance, the Cooperative Marketing Act of South Dakota provides that—36

36

Upon demand of forty percent of the entire board of directors any matter that has been approved or passed by the board must be referred to the entire membership or the stockholders for decision at the next special or regular meeting: Provided, however, That a special meeting may be called for the purpose.

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.37

A cooperative statute 38 of Indiana contains a provision reading as follows:

In the absence of any provision in the bylaws of an association after March 1, 1940, authorizing the incurring of indebtedness to the association by any director, manager, officer or employee the extension of credit to any such individual to any amount exceeding one-half his monthly salary and/or three-fourths of the par value of stock owned by such individual shall be deemed to be forbidden by such bylaws. Such value of stock shall be computed as including any credit for the purchase of stock not yet actually issued to such individual. No reason is apparent why directors of a cooperative association could not under certain circumstances be held liable for losses arising from a violation of the foregoing statutory provision.

Additional Liabilities Imposed by Statute

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 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 39 or officers of corporations, or both.40 Generally speaking, these provisions are applicable to the directors and officers of cooperative associations.

As illustrating the liability under statutes of the directors of cooperatives, a case passed upon by the Supreme Court of Montana involving a cooperative association is of interest. In this case the directors

38

Compiled Laws of South Dakota 1929, as amended, sec. 8007-R.

37 Farmers' Co-operative Trust Company v. Floyd, 47 Ohio St. 525, 26 N. E. 110,

12 L. R. A. 346.

38 Laws of Indiana, 1939, ch. 151, sec. (I J), p. 717.

39 Farmers' Co-op. Trust Company v. Floyd, 47 Ohio St. 525, 26 N. E. 110, 12 L. R. A. 346.

40 Rice v. Madelia Farmers' Warehouse Co., 87 Minn. 398, 92 N. W. 225.

41

were held liable to creditors because they failed to file a report required by a Montana State statute, showing the condition of the association.* The Constitution of California until changed in 1930 provided thatThe directors or trustees of corporations and joint-stock associations shall be jointly and severally liable to the creditors and stockholders for all moneys embezzled or misappropriated by the officers of such corporation or joint-stock association, during the term of office of such director or trustee.

In a case 12 which was passed upon by the Supreme Court of California, an officer of a corporation was held liable to the trustees in bankruptcy of the corporation because he sold an automobile he owned to the corporation, thus acting in the dual capacity of buyer and seller without disclosing the facts to the corporation.

Section 1622 of the 1924 Code of Iowa reads as follows:

If the indebtedness of any corporation shall exceed the amount of indebtedness permitted by law, the directors and officers of such corporations knowingly consenting thereto, shall be personally and individually liable to the creditors of such corporation for such excess.

43

Directors of cooperatives should ascertain the duties and liabilities imposed upon them by State constitutions and statutes and should govern their actions accordingly. It is not sufficient, ordinarily, simply to examine the cooperative statutes of the State; the general statutes of the State relative to directors should also be carefully examined. Under many of the corporation statutes the directors of a corporation at the time of its dissolution are trustees for its creditors.**

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 its affairs. The general rule is that the board of directors of a corporation may delegate ministerial matters to an executive committee, but generally it is held that a board of directors may not delegate its own discretionary power. In a few States it is held that the directors have the power without statutory authority to delegate to officers, agents, or executive com

45

41 Anderson v. Equity Co-op. Ass'n, 67 Mont. 291, 215 P. 802; Githers v. Clarke, 158 Pa. 616, 28 A. 232.

42

43

Dean v. Shingle, 198 Cal. 652, 246 P. 1049, 46 A. L. R. 1156.

Parsons v. Rinard Grain Co., 186 Iowa 1017, 173 N. W. 276; Platner v. Hughes,

200 Iowa 1363, 206 N. W. 268, 43 A. L. R. 1141 and footnote thereto.

"Kansas Wheat Growers' Association v. Markley, 132 Kan. 156, 294 P. 885.

mittees the power to transact not only ordinary and routine business but business requiring the highest degree of judgment and discretion.16 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, they may have such policy or course carried out by an executive committee or by any other means deemed advisable; but generally the initiation of fundamental policies should be done 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. The general rules pertaining to boards of directors, such as those concerning quorums, apply to executive committees.

Minutes of Meetings

The minutes of meetings of the board of directors of an association should tell the story of the board's action on association business. Likewise, the minutes of meetings of association members should tell the story of the action they have taken respecting its affairs. 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. 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. If no minutes are made of the action of the board of directors, oral testimony is admissible to show the action taken in the event a question on this point should arise in the course of a lawsuit.47

The minutes of a meeting should show the date and hour when it was held. The statutes of many States expressly authorize the holding of board meetings outside the State in which the corporation was incorporated. There is a serious question whether action taken by a board of directors at a meeting outside such State is legally binding

46 Jones v. Williams, 139 Mo. 1, 39 S. W. 486, 40 S. W. 353, 61 Am. St. Rep. 436, 37 L. R. A. 682; Haldeman v. Haldeman, 176 Ky. 635, 197 S. W. 376. See also United States v. Union Pacific Railroad Company, 226 U. S. 470, 33 S. Ct. 162, 57 L. Ed. 306.

47 Robson v. C. E. Fenniman Co., 83 N. J. Law 453, 85 A. 356; Whitlock Alexander, 160 N. C. 465, 76 S. E. 538; Hughes Mfg. & Lumber Co. v. Wilcox, 13 Cal. App. 22, 108 P. 871; Iowa Drug Co. v. Souers, 139 Iowa 72, 117 N. W. 300, 19 L. R. A. (N. S.) 115; Traxler v. Minneapolis Cedar & Lumber Co., 128 Minn. 295, 150 N. W. 914.

on third persons and the corporation in the absence of a statutory or charter provision authorizing the same.

48

The action taken by directors of an association at a meeting of the board should be recorded in the minutes of the board. The action taken by members of an association in the meetings thereof should be recorded in the minutes of the association. The directors of an association possess all the corporate powers of the association not specifically reserved to the members. The directors of an association should direct and manage its affairs within the scope of the powers conferred by the charter, subject to any restrictions contained in its bylaws or marketing contracts. The execution of the orders or the carrying out of the policies fixed by the board of directors is done by the officers and employees thereof. Officers of an association by reason of their offices, or employees by reason of their employment, regardless of their rank, have no authority to bind the association unless such authority has been conferred upon them otherwise than by their election to office or by their employment.

Authority for the action of the officers of an association or its employees should be found in the action of the board of directors. In this lies the chief importance of minutes of boards of directors. If no minutes are kept of board meetings, oral testimony is admissible to show action taken; on the other hand, if minutes are kept, such minutes are regarded as the best evidence of action taken by the board of directors in the absence of evidence of fraud impeaching the minutes.49

All courts in the absence of fraud impeaching the minutes, regard the minutes at least as prima facie evidence of the action taken by the board of directors.50

Before loaning money to an association, banks frequently, if not generally, inquire if the officers have been authorized by the board of directors to borrow money. Frequently a copy of the minutes of the board of directors covering the matter is requested. This is done to see if the board has authorized the proposed action or has imposed any restrictions with reference thereto, for it will be constantly remembered that an association may act only through agents

48 Ballantine's MANUAL OF CORPORATION LAW AND PRACTICE, sec. 102; 2 Fletcher CYCLOPEDIA CORPORATIONS, Perm. Ed., sec. 403.

49

German Ins. Co. of Freeport, Ill., v. Independent School District of Milford, Dickinson County, Iowa, 80 F. 366; Hawkshaw v. Supreme Lodge of Knights of Honor, 29 F. 770.

50 14 C. J. 376, 377.