#120 Lowell Hoit Co. vs.

Detig AUTHOR: DAYOS

320 Ill. App. 179 (Ill. App. Ct. 1943)
TOPIC: Duty of Diligence: Business Judgments Rule
PONENTE:
NOTES: An action against appellees to recover for an
alleged willful conversion of grain belonging to
appellant, and has to do with liabillity of corporate
directors for corporate torts or acts of subordinate
officers.

FACTS:
 Appellees were directors in a farmers cooperative grain company.
 It operated an elevator under the corporate name of Steward Cooperative Grain Company, the management
and conduct of the elevator business was in charged to Hermann.
 In July 1939, Hermann leased [one dollar and one half of net profits] the elevator bins for storage of oats to
the plaintiff Hoit.
 Subsequently, the company, through Hermann, sold 9,081 of the 12,000 bushels of oats stored in the bins
without knowledge nor consent of Hoit.
 However, it appears that the appellees (directors) had no knowledge of such agreement made by Hermann in
behalf of the corporation.
 Hoit claims that appellee directors should be held liable upon their common law liability; that it was their
legal duty to exercise such supervision as might be required of them in order that they know and have
knowledge of what the agent of the corporation was doing in connection with the corporate business.
 In addition, Hoit alleges that they, as directors of the corporation, by resolution made in September 1939,
ordered and directed the manager Herrmann, to sell all grain on hands.
 On the other hand, Appellee directors contend that they are not liable for the torts of the corporation merely
because they are directors, but that they are liable only for such torts in which they participated, or of
which they had knowledge, authorized or directed.
 Judgment was entered for plaintiff appellant against Claude V. Herrmann, for the amount claimed.
Judgment was also entered in favor of defendant directors, and hence this appeal.

ISSUE(S): W/n appellee directors were negligent insofar as their failure to supervise the affairs of Hermann?

HELD: NO

RATIO:

The court recognizes the right of the directors to entrust immediate corporate governance to its subordinates.

Nothing appears in this case to indicate that appellees did not exercise care and prudence in their selection of the
agent Herrmann. Neither does it appear that they sought to divest themselves of a general supervision of the
conduct of the business.

Further, nothing appears that they had any knowledge of, or had acquiesced in a continuous or repeated conduct
on Hermann’s part.

In this case, single act secreted by the subordinate officer from the directors, with the contract locked up by him
without their knowledge of its existence, and no corporate record to come before them reflecting such
transaction. Under such circumstances, it can hardly be said that appellees in the exercise of ordinary and
reasonable supervision could have detected the wrongdoing of their subordinate officer.
CASE LAW/ DOCTRINE: The mere fact that a person is a director of a corporation does not necessarily
render him liable for the torts of the corporation or its agents.

For a director to be held liable for the acts of corporate officers, the following conditions must be present:
1. The director must have participated in the act complained of;
2. He must be guilty of lack of ordinary and reasonable supervision; and
3. He must be guilty of lack of ordinary care in the selection of such officer.
DISSENTING/CONCURRING OPINION(S):