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.69 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."1

70

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 72.

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."

73

A cooperative statute 74 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 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 75 or officers of corporations, or both." Generally speaking, these provisions are applicable to the directors and officers of cooperatives.

76

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

69

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

70

Michigan Wolverine Student Cooperative, Inc. v. Wm. Goodyear & Co., 314 Mich. 590, 22 N. W. 2d 884.

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

72

73

S. D. Code of 1939, sec. 4.1617.

Cf. Tenn. Code Ann., sec. 3815.

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

74 Ind. Stats. Ann., sec. 15-1611 (j).

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

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

to creditors because they failed to file a report showing the condition of the association as required by a Montana statute.”

The Constitution of California until changed in 1930 provided that— The 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 78 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.

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.79

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.80

In a few States it is held that the 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.81

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; 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. Like

"Anderson v. Equity Coop. Association, 67 Mont. 291, 215 P. 802; Githers v. Clarke, 158 Pa. 616, 28 A. 232.

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

80

81

Kansas Wheat Growers' Association v. Markley, 132 Kan. 156, 294 P. 885. Ames v. Goldfield Merger Mines Co., 227 F. 292.

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 Ú. S. 470, 33 S. Ct. 162, 57 L. Ed. 306.

wise, 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.82

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 on third persons and the corporation in the absence of a statutory or charter provision authorizing the same.83

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.84

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. 85

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 direc

82 Robson v. C. E. Fenniman Co., 83 N. J. Law 453, 85 A. 356; Whitlock v. 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.

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

84 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.

85 14 C. J. 376, 377.

tors 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 and that persons dealing with an agent act at their own risk. If it should turn out that the agent, whether he be president, secretary, or manager, was not authorized to enter into the contract in question on behalf of the association or to engage in any other transaction as its representative, the association is not bound in the absence of estoppel or ratification.86 On the other hand, if the minutes of a meeting of the board of directors show that the officer was authorized to enter into a certain transaction, such minutes are virtually conclusive on the subject in the absence of fraud, and protect the officer representing the association in the transaction as well as the other party thereto. The failure to record a resolution of a board of directors does not affect its validity.87

While a corporation's books and records are evidence to prove its own acts, they are not competent evidence against third persons to prove contracts with them in the absence of proof that they knew and assented thereto.8

B

88

Officers and Employees

ROADLY stated, all employees and representatives of an association are agents thereof.

Officers of an association are agents 89 and the general rules of agency apply to them. The officers of an association, or certain of them, under the statutes, are usually required to be elected by the directors from among their own number.90 On the other hand, unless required by law, the charter, or the bylaws, the officers of a corporation need be neither directors nor members nor stockholders thereof.91

The legality of the election of an officer may not be attacked collaterally.92

93

Reasonable care should be exercised in the selection of employees because failure to do so may be a basis for charging an association with liability.9 The manager of a cooperative, like its officers and directors, should invariably avoid situations where it might even remotely appear that he had interests adverse to those of the association. An association may recover money made by a manager from unauthorized undisclosed business transactions involving or affecting the association, even though the association suffers no loss therefrom. And in the 94 case cited below, the surety was also held liable on the faithful performance bond of the manager who engaged in such transactions.

86 David Stott Flour Mills, Inc. v. Saginaw County Farm Bureau, 237 Mich. 657, 213 N. W. 147; Farmers' Coop. Mercantile Co. v. Shultz, 113 Neb. 801, 205 N. W. 288. 87 Handley v. Stutz, 139 U. S. 417, 11 S. Ct. 530, 35 L. Ed. 227.

88 Oregon and C. R. Co. v. Grubissich, 206 F. 577.

89 Allen v. Cochran, 160 La. 425, 107 So. 292, 50 A. L. R. 459.

90 See sec. 13 of the Bingham Cooperative Marketing Act of Kentucky, p. 304 of Appendix.

412.

Wight v. Springfield & New London Railroad Co., 117 Mass. 226, 19 Am. Rep.

92 Bruun v. Cook, 280 Mich. 484, 273 N. W. 774.

93 Ellsworth v. Franklin County Agricultural Society, 99 App. Div. 119, 91 N. Y. S. 1040.

94 Goodhue Farmers' Warehouse Co. v. Davis, 81 Minn. 210, 83 N. W. 531. See also Hoffman v. Farmers' Coop. Shipping Association, 78 Kan. 561, 97 P. 440; 7 R. C. L., sec. 426.

Terms and Compensation

Officers, like directors, barring resignation or expulsion, continue in office after the expiration of the terms for which elected until the election and qualification of their successors, with all the rights and responsibilities of such officers.9

95

Presumptively, officers, as well as directors, of an association serve without compensation while performing the regular duties of their offices; 96 and generally these officers are entitled to no compensation for performing the duties of their offices unless provision therefor was made prior to assuming their duties.

In a North Carolina case, the president of the North Carolina Agricultural Credit Corporation sought to recover compensation for work performed when he was president of the corporation. The court held that he was not entitled to any compensation for the services rendered by him as president because no express contract of employment providing for compensation had been made prior to the rendition of the services.97

Officers, like directors, do not have the power to fix their own salaries. If their salaries or the method of fixing their salaries is not prescribed in the statute or bylaws or by the members, they may be fixed, or contracts providing for compensation may be made, as a general rule, only prior to the rendition of services, by a quorum of directors in a board meeting, who are not officers of the association or in any other way disqualified.

Powers of Officers

98

Neither the president nor any other agent of an association has any inherent power by virtue of his office or employment to enter into business transactions on its behalf,99 and unless authority to do so is conferred upon officers or other employees it is not possessed by them. For instance, unless specially authorized to do so, an officer of an association could not accept payment of a note calling for payment in money, except by the receipt of money and then only by receiving the full sum due. In this connection, it is said:

A corporation is bound by the act of an officer or agent only to the extent that the power to do the act has been conferred upon such officer or agent expressly by the charter, bylaws, or corporate action of its stockholders or board of directors, or can be implied from the powers expressly conferred, or which are incidental thereto, or where the act is within the apparent powers which the corporation has caused those with whom its officers or agents have dealt to believe it has conferred upon them.2

95 Weil v. Defenbach, 36 Idaho 37, 208 P. 1025; Stanton v. Occidental Life Ins. Co., 81 Mont. 44, 261 P. 620.

96

First National Bank of Allen v. Daugherty, 122 Okla. 47, 250 P. 796; Navco Hardwood Co. v. Bass, 214 Ala. 553, 108 So. 452.

"North Carolina Agricultural Credit Corporation v. Boushall, 193 N. C. 605, 137 S. E. 721; Goodin v. Dixie-Portland Cement Co., 79 W. Va. 83, 90 S. E. 544, L. R. A. 1917F 308; Baltimore & Jamaica Trading Co. v. Dinning, 141 Md. 318, 118 A. 801.

98

Briggs v. Gilbert Grocery Co., 116 Ohio 343, 156 N. E. 494; Schaffhauser v. Arnholt & Schaefer Brewing Co., 218 Pa. 298, 67 A. 417, 11 Ann. Cas. 772.

99

Sterling v. Trust Co. of Norfolk, 149 Va. 867, 141 S. E. 856.

1 Stanton v. Occidental Life Ins. Co., 81 Mont. 44, 261 P. 620.

2

Aerial League of America v. Aircraft Fireproofing Corporation, 97 N. J. L. 530, 117 A. 704. See also Merchants' National Bank of Peoria v. Nichols & Shepard Company, 223 Ill. 41, 79 N. E. 38, 7 L. R. A. (N. S.) 752; Peasley v. Producers' Market Co., 86 Cal. App. 577, 261 P. 733; David Stott Flour Mills, Inc. v. Saginaw County Farm Bureau, 237 Mich. 657, 213 N. W. 147.