Monday, April 22, 2013

An Early Decision on the Liability of Managerial Employees versus Owners

An Early Decision on the Liability of Managerial Employees versus Owners

      Greenup and Innes v. Barbee’s executor, 4 Ky. Rep. (1 Bib) 320 (1809), is an interesting early decision addressing the distinction between the liability of owners versus the liability of non-owner managers.
      A company, not incorporated and not identified by name, was organized in Danville in 1789.  Greenup, Innes and Barbee were appointed the managers of the venture.  Barbee was not an owner in the venture.  It contracted with John Brown in Philadelphia to construct the necessary machinery, an undertaking that exhausted the initial payment made – still Brown completed the task of manufacturing the equipment.  Innes and Barbee, on behalf of the venture, delivered a note to Brown for the amount due.  The venture failed and its few assets were sold by the sheriff – most of the debt to Brown remained outstanding.  He then brought suit against Barbee, on which he prevailed by default (the opinion is not clear – Barbee may at this point have already been deceased).  The trial court then ordered Greenup and Innes, the other two managers, to pay one-third of the debt to Brown, Barbee’s estate being one-third liable thereon.
      On appeal the judgment against Barbee was reversed.  As to the liability on the note to Brown:

It is evident that the company are liable to the defendant for the amount he has been, or may be compelled to pay on their account.  As the company was not an incorporated body, the total exhaustion of the property put into common stock in the payment of demands upon the company does not exonerate the members of it from further responsibility.  They continue responsible in their individual capacities to the full amount of every debt justly due from the association.
      But as to the managers not owners of the venture, a set including Barbee:

But it does not appear that the plaintiffs in this case were members of the association, or that they were any otherwise concerned than as managers or agents for the company.  In that capacity they could make themselves personally liable only by acting fraudulently, or exceeding their authority, or by receiving money belonging to the association which they had not accounted for; but none of these charges are alleged by the defendant, nor does there appear anything in the cause by which such charges could be supported.
      Hence Barbee was not responsible in whole or in part for the debt to Brown.
      Today the same rule is recited in the Restatement (3rd) of Agency as to the liability of an agent on a contract entered into on behalf of a disclosed principal.

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