Albert Walker v.

Alrich Man, et al AUTHOR: Acido

253 NYS 458 (1931) NOTES: Only the second cause of action is relevant to the
TOPIC: Duty of Diligence: Business Judgments Rule discussion of the topic. But just in case he asks, I included
PONENTE: Collins, J. the others in less detail haha
FACTS:
 Albert Walker, the trustee in bankruptcy of Frederick Southack Alwyn Ball, Jr., Inc., instituted litigation, seeking to
recover $1,677,411.19 from the defendants, as former directors of the bankrupt corporation, for dereliction of duty
and mismanagement in the conduct of the bankrupt's affairs.
 The bankrupt was a domestic corporation engaged in the business of managing real properties, as agents for owners,
in New York city, the leasing and renting of real property, the underwriting and selling of corporate bonds secured by
mortgages upon real estate, and other business of a general real estate character. Its by-laws provided for a board of
directors consisting of fifteen members, and that the business affairs of the bankrupt were managed by a board of
directors consisting of fifteen men, or a lesser number, during the entire period of the carrying on of its business.
 The defendant Man moves for judgment dismissing the amended complaint on the ground generally that it does not
state facts sufficient to constitute a cause of action against him; specifically moves to dismiss the first, second, third,
fourth, seventh, eighth, ninth, tenth and eleventh causes of action…
o 1st cause of action – Defendant Wheeler was employed by the defendant Alwyn Ball under an
agreement whereby Wheeler was to receive 18% of the gross amount of any moneys received by him
or the corporation on account of the sale of the corporation's shares of stock when the corporation was
formed. The agreement was not authorized by any resolution of the board of directors and that the
defendant Alwyn Ball, though purporting to act for the corporation, acted without any authority of the
corporation or the board; that thereafter the corporation paid to Wheeler $232,000 as commission and
for his services in selling $875,210 of the stock; that the board knew that substantial payments were
being made to Wheeler "and knew or ought to have known the approximate amount thereof."
TL;DR: Wheeler was overpaid and the directors didn’t care
o 2nd - In about February, 1925, the bankrupt advanced to one M.H. Avram or M.H. Avram Co. the sum
of $20,000, taking as security therefor the note of M.H. Avram or M.H. Avram Co. indorsed by one
J.D. Lacey; that the loan was not authorized by any meeting of the board of directors and "was not for
the benefit of the corporation or in aid of any business or business affairs of the corporation;" that this
loan item remained on the bankrupt's books until the bankruptcy as unpaid and appeared as an asset
"in various statements issued by said corporation from time to time." The note was dishonored, and
that "no steps or proceedings were taken by the defendants to have said note protested for
nonpayment and said note was negligently, carelessly or wilfully and fraudulently permitted to
remain unprotested and as a result thereof, the said Lacey, the endorser thereof, who was fully and
amply able financially to meet said obligation, was released and discharged from any obligation
arising by virtue of his endorsement of said note.” Damage in the sum of $20,000 is claimed. TL;DR:
Loan was unauthorized. Directors did not protest the note for non-payment, discharging the
indorser Lacey from his obligation.
o 3rd, 4th, 5th - declaration and payment of dividends in violation of section 58 of the Stock Corporation
Law (payment of dividends out of surplus instead of earnings)
o 7th – BoD voted that the corporation buy from the defendants Ball (also directors) units of stock;
basically conflict of interest
o 8th – corporation incurred losses because of defendants’ negligence
o 9th – mismanagement and excessive construction costs
o 10th – general daw. Needs bill of particulars haha
o 11th – unlawful purchase of worthless stock
ISSUE(S):
Whether or not the amended complaint against Man, et al should be dismissed.

HELD:
No. Motion denied in all respects.
RATIO:
 Directors are charged not only with misfeasance, but with nonfeasance, not only with doing wrongful acts and
committing waste, but with acquiescing in and confirming the wrongdoing of others, and with doing nothing to
retrieve the waste. As directors, these defendants were not only obligated to do nothing wrongful themselves, but
to attempt to prevent wrongdoing by their fellow directors, and, if wrong be committed, to seek to rectify it.
  Passivity and disavowal of knowledge alone do not constitute a pass to freedom from responsibility. A director
may not shut off liability by shutting off his hearing and sight. It is his duty to know what is transpiring. The
company's stockholders and creditors, as well as the public, have a right to rely upon the performance by him of
the duties of a director.
 Kavanaugh v. Gould: "The law has no place for dummy directors." "They are bound generally to use every effort
that a prudent business man would use in supervising his own affairs." If at their meetings, or otherwise,
information should come to [directors] them of irregularity in the proceedings of the" corporation, "they are bound
to take steps to correct those irregularities."
 In challenging the sufficiency of the second cause of action, Man urges that there is no allegation that he was a
director at the time of the loan, and that it does not appear that at the time he was a director, Lacey could have been
held by a suit upon the note. However, if knew that an improvident and unauthorized loan had been made, and
took no steps whatever at salvaging the loan, and acquiesced in and confirmed the original wrongful act, he would
be open to the charge of negligence and should account for his conduct.

CASE LAW/ DOCTRINE:

DISSENTING/CONCURRING OPINION(S):