Barnes, Plaintiff AUTHOR: BONDOC

v.
Andrews, Defendant

TOPIC: Duty of Diligence: Business judgment rule

PONENTE: Street J.
FACTS:

Earl Barnes, as a receiver of the Liberty Starter Corporation filed a suit against Charles Lee Andrews.

Liberty Starter Corporation was organized under the laws of New York to manufacture starters for Ford motors and aeroplanes. On October 9, 1919,
a year after its organization, defendant took offices as a director, and served until he resigned on June 21, 1920. During that period over $500,000
was raised by sale of stocks of company. Officers and employees were hired and a factory was already erected when defendant Andrews took office.
Starter parts were made, but delays were experienced in its production as a “whole”, and the the funds of the company were depleted by running
charges.

During the incumbency of defendant, there had been only 2 meetings of directors, one defendant Andrews was able to attend, but the other he was
forced to be absent due to his mother’s death. Also, defendant was a friend of the President, who induced him as the largest stockholder to be
come a director, and his only attention to the affairs of the company consisted of talks with the president.

After defendant resigned, the company continued its business. However, when plaintiff was appointed as receiver he found the company without
funds, and realized only a small amount in sale if its assets.

The theory of the bill (in equity) was that defendant failed to give adequate attention to the affairs of the company, which was conducted
incompetently and without regard to the waste of salaries during the period, before the production. That this period was prolonged by the
incompetence of the factory manager, and disagreement between defendant and the engineer. More money was paid in the engineer that his
contract, and money was spend upon fraudulent circulars to induce the purchase of stocks.
ISSUE(S):

WON defendant Andrews may be held liable for misprision of office

HELD: Yes.
RATIO:

Defendant cannot be charged with neglect in attending the director’s meeting because there are only 2 meeting and one of which he was able to
attend. His liability only depends upon his failure to keep advised of the conduct of the corporate affairs.

Directors must give reasonable attention to the corporate business. Directors have individual duty to keep themselves informed and it is this duty
which the defendant failed to perform.

All defendant did was to talk to Maynard (President) as they met. But he did not press him for details as he should. Andrews was bound to inform
himself of what was going on with the company; and if he had done so he would have learned that there were delays in the production which put
the company in serious peril. Having accepted a post of confidence, he was charged with duty to learn whether the company was moving to
production, and why it was not, and to consider what could be done to avoid conflicts among the personnel or their incompetence.

However, SC said that Andrews cannot be blame for the collapse of the company. Defendant is not subject to the burden of proving that the
collapse would have happened, whether he has done his duty or not. Because no man would take an office, if the law imposed upon them the
guarantee of the success of their company. Plaintiff Barnes must show that, had Andrewes done his duty he could have made the company prosper,
or at least could have prevented its fall. Plaintiff must show what sum could have save the company. But this plaintiff failed to do.

Hence, considering that there is no evidence that defendant’s neglect caused any losses to the company, and that if there were, the loss cannot be
ascertained. Defendant Andrew is not liable for the fall of the company.

The bill is dismissed, without cost.

CASE LAW/ DOCTRINE:

Directors must give reasonable attention to the corporate business. Directors have individual duty to keep themselves informed and it is this duty
which the defendant failed to perform.
DISSENTING/CONCURRING OPINION(S):