Can Superiors Be Liable for Fraud Carried Out by a Subordinate Without Their Knowledge ?
In Hoit & Co. v. Detig, 320 Ill. App. 179, 50 N.E.2d 602 (1943), the plaintiff had oats stored at a grain elevator of which the defendants were directors.
Without the plaintiff's consent, Herrmann, the manager of the elevator, sold the grain to a third party.
The plaintiff sought to hold the defend ants personally liable for the conversion even though the evidence showed that they had no knowledge that the plaintiff even had grain at the elevator.
The court held that the defendants were not reckless or negligent in their oversight of Herrmann:
"Nothing appears in this case to indicate that the defendants did not exercise care and prudence in their selection of the agent Herrmann.
Neither does it appear as if they sought to divest themselves of a general supervision of the conduct of the business.
Further, nothing appears to indicate that they had any knowledge of, or had acquiesced in a continuous or repeated course of conduct on the part of Herrmann such as committed in the present instance.
Courts will treat directors with more leniency with respect to a single isolated act of fraud on the part of a subordinate officer or agent, than where the practice appears to have been so habitually and openly committed as to have been easily detected upon proper supervision.
We do not consider the directors to be personally liable under the evidence in this case.
Here we find a 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." Lowell Hoit, 320 Ill. App. at 182.