55 Md. 419 | Md. | 1881
delivered the opinion of the Court.
The bill in this case was filed on the 7th of August, 1875, by certain persons as shareholders of the stock of the Powhatan Steamboat Company, a corporation formed under the act of the Legislature of 1840, ch. 167, against the defendants, some of whom were directors in the company, for the purpose of obtaining redress for what is. alleged to have been their loss in the value of their shares of stock, by reason of certain wilful and'fraudulent mismanagement of the affairs of the corporation, to accomplish objects and purposes adverse to the interest of the-shareholders of the stock of the company.
By the charter, the company was clothed with power to-provide itself with all necessary steamboats, and other-equipments, “to navigate the Chesapeake bay and its-tributary streams, for the conveyance of passengers, towing of ships, vessels, rafts or arks, and the transportation of merchandise or other articles.” The affairs of the company were required to he managed by a president and board of directors to consist of six persons, to be chosen from the stockholders, the president to be one of the six directors and a majority of the directors, at all meetings, to have power to act as if all were present. The power given by the charter to the board of directors, was very large, and comprehensive. It authorized them not only to employ all necessary agents, to make contracts, to buy property both,
Before this company had been incorporated, the Baltimore Steam Packet Company had been incorporated by the Act of the Legislature of 1839, ch. 328; and the object of that company was to provide the necessary steamboats •and equipment, “to navigate the Chesapeake bay and its tributary streams, or to navigate the Atlantic coast, or ■any of the bays or rivers emptying into the Atlantic Ocean; and to connect thereto boats, vessels, stages, or other carriages, for the conveyance of passengers, towing ■of ships, vessels, rafts, or arks, and the transportation of merchandise or other articles.” The board of directors is required to consist of eight persons, to be chosen from the stockholders, and the president of the board to be one of the directors. The provisions of the charter, and the powers of the board of directors, are substantially, and •almost literally, the same as those contained in the ■charter of the Powhatan Steamboat Company.
Both companies were organized and operated for several .years prio.r to the late civil war; but the war suspended the operations of both companies. After the close of the war, the Steam Packet Company resumed operations, and the Powhatan Company reorganized, by the purchase of •several second-hand steamers for stock of the company, -at rates considerably in excess of the prices of the steamers to those disposing of them to thé company. The routes ■of the two companies were not at all in conflict the one
These were the routes of the two steamboat companies, and there had been no serious conflict or competition between them prior to the fall of the year 1870 ; but there had been considerable competition between the Powhatan Company and the Richmond, Fredericksburg and Potomac Railroad Company, running from Richmond to Acquia creek, and from the latter point by steamers, hy way of the lower Potomac and the Chesapeake hay, to Baltimore City. The Powhatan Company had also encountered strong competition on its York river line, and was com-, pelled to buy off the steamers engaged in the opposition.
In the latter part of November, in the year 1870, the Steam Packet Company became the purchasers of 1108 shares of the capital stock of the Powhatan Company, at $40 per share, the par value being $100 per share. This quantity of stock was about one-third of all then issued hy the company. And, according to arrangement, this stock thus purchased was transferred to the names of Jno. M. Robinson and Samuel M. Shoemaker, two of the directors in the Steam Packet Company; and thereupon, two of the directors in the Powhatan Company, namely, Messrs. Lehr and O’Donnell, retired, and Robinson and
The bill charges, that Eohinson and Shoemaker, having obtained admission into the Powhatan Company, acted not for the promotion of the interest and welfare of the stockholders of that company, as they were in duty bound to do, but that they acted “on their own hehalf and for their own interest, as well as in behalf and for the interest of others owning and controlling together with themselves, a majority of the stock of said three confederating companies, unlawfully and covinously combined together, to cripple, embarrass, and destroy the said Powhatan Steamboat Company, so as to secure to the said Baltimore Steam Packet Company, and its said confederates, or such other companies as it might choose, a monopoly of the said routes of the said Powhatan Steamboat Company; ” and that it was with that view and purpose that they purchased on behalf of the Steam Packet Company the 1108 shares of stock, and procured themselves to be elected directors in the Powhatan Company; and from that time they continued their plans and contrivances for the ruin of the Powhatan Company, and finally brought it to total wreck, in the winter of 1875, by declaring it insolvent and thenceforth unable to proceed with its business. There are various acts and transactions charged as means resorted to to bring about the result. It is charged that through the contrivance of Eohinson and Shoemaker, the better to obtain complete control over the Powhatan Company, they being directors in both companies, the
The answers of the defendants, Moncure Robinson, John M. Robinson and Samuel M. Shoemaker, Thomas
Jacob Brandt, a former director and president of the company, is also a defendant, and he filed a separate answer to the hill, in which he admits most of the material facts charged ; and he was afterwards examined as a witness for the plaintiffs.
There has been a very large mass of evidence produced, •documentary as well as oral testimony of witnesses ; hut before making special reference to this evidence, it is proper that we should state the general principles of law that would seem to he applicable, and which must govern in the determination of the case.
The first question is, as to the power of the Steam Packet Company to purchase and hold the stock of the Powhatan Company. This, it is contended by the plaintiffs, could not be done without express authority by law. But, while some Courts have so held, the great weight of authority is the other way. There is nothing in the charter of the Steam Packet Company, or in the nature of its business, that would, in the slightest manner, forbid the •exercise of such power; and having money to loan or invest, there would appear to he no good reason why it might not invest in the stock of other corporations as well ■ as in any other funds, provided it he done bona fide, and with no sinister or unlawful purpose. The Courts of
It is also alleged and insisted that the $40,000 advanced or loaned by the Steam Packet Company to the Powhatan Company, upon what is alleged to be the security of the steamer Petersburg, was unauthorized by any power contained in its charter; and, upon the principle now perfectly well settled, that a body incorporated for special purposes cannot devote any part of its funds to objects unauthorized by the terms of its charter, it is contended that such contract for loan or advancement was therefore void. But whether we regard this transaction as being strictly within the powers of the Steam Packet Company, or otherwise, the legal result, so far as the stockholders of the Powhatan Company are concerned, must be the same. If the transaction be treated as a sale and purchase of the steamer, as contended by the defendants, there can be no question as to the existence of ample power; for the charters of both the Steam Packet Company and the Powhatan Company confer express authority to purchase and sell steamers. If, however, the transaction be treated as a loan, secured by mortgage, even conceding that there could be a question of the power of the Steam Packet Company to make such a loan of its funds, the contract being an executed one, that question of power could not be raised on a proceeding like the present. Moreover, in such case, where the parties complaining have received the consideration of the contract, in other respects just and equitable, there is no principle upon which a Court of equity could be induced to interfere upon the mere ground of the want of authority in the adverse party. Elysville Manf. Co. vs. Okisko Co., 5 Md., 152; National Bank vs. Matthews, 98 U. S., 621, 628; Silver Lake Bank vs. North, 4 John. Ch., 370. And the same considerations apply to all the mortgages made by the Powhatan Company to the Steam Packet Company.
Seeing, then, that the case presents no-question of ultra vires in the transactions referred to, the next question is, upon what principle or doctrine are the defendants in this case to be held responsible to the plaintiffs for losses, alleged to have been sustained by them,-in-the management of the affairs of the corporation ? • • ■ ■ ' ■
Directors in joint stock corporations are not, in the strict and technical sense of the term, trustees for the stockholders. The property of the corporation is not vested in them, but in the body corporate. They are, however, in one sense, trustees, and 'they occupy a fiduciary relation to the corporation and its stockholders.
In the English Courts, the case of the Charitable Corporation vs. Sutton, 2 Atk., 400, decided in 1742, is the first that occurs in which the liability of the directors to the corporation for breaches of duty amounting to breaches of trust, is fully and accurately defined. In that case,Lord Habdwicke, in defining the degree of care and fidelity required of a director, and for what nature of default he may be liable, referred to the doctrine of the civil law upon the subject. By that law it is declared that “those who are named by companies and corporations to have the direction of their affairs, are obliged to the same care and diligence as factors or agents. And they are answerable, not only for any fraud and gross negligence which they may be guilty of, but also for all faults that are contrary to the care required of them." 1 Domat, 2 b. tit. 3, sec. 2, Art. 1. And in that case of Sutton, the Lord Chancellor held, that directors of a corporation are liable in equity to the corporation, not only for gross frauds and breaches of trust, whereby the assets of the corporation are wasted, but are also liable to the corporation, if the assets of the corporation have been wasted by negligence on their part so gross as to amount to a breach of trust. This is the leading case upon the subject, and in which the law is. as
In the case of Overend, Gurney & Co. vs. Gurney, L. R., 4 Ch.,101, and the same case on appeal, reported as Overend, Gurney & Co. vs. Gibb, L. R., 5 H. L., 480, where the question was most elaborately discussed in respect to the negligence of directors, it was held, that facts which may show imprudence in the exercise of powers clearly conferred upon directors will not subject them to personal responsibility ; but if the imprudence be so great and manifest as to amount to crassa negligentia, and consequently a breach of trust, personal responsibility will be incurred. Indeed, all the cases agree that directors are not liable for the consequences of unwise or indiscreet management, if their conduct is entirely due to mere default or mistakes of judgment. And the onus of proof of fraud, combination, or gross negligence, to render the directors personally liable, is upon the party making the charge; and the proof must be clear and manifest. Turquand vs. Marshall, L. R., 4 Ch., 376; Overend, Gurney & Co. vs. Gibb, L. R., 5 H. L., 480; Hodges vs. New England Screw Co., 1 R. I, 312.
In these cases, the proper and primary party to complain and call the directors to an account, in a Court of equity, for fraud or breaches of trust, in the management of the affairs of the corporation, is the corporation itself; because the duty is owing, and the wrong is done directly to the corporation, and only indirectly to the shareholders.
In this case, the fact that Robinson and Shoemaker were stockholders and directors in the Steam Packet Company, as well as in the Powhatan Company, and participated in the transactions between the two companies, with certain interest in other companies, supposed to be interested, would seem to constitute the main foundation for the principal charges of the bill. And if
Such is the law as applicable to the case as stated in the bill. But if, upon the proof, there is a failure to establish the fraudulent design or purpose alleged to-have characterized the various acts and transactions done- and instigated by the two directors named, the whole foundation of the case fails. For, as we have seen, mere-indiscretion, want of skill or foresight, or mistakes of judg
And upon the question of the fraudulent intent or design charged, though it he true that these two directors represented both corporations, — in the one, being two of a hoard of eight directors, and in the other, two of a hoard of six directors, — this fact alone, while it should subject their conduct to rigid scrutiny by the Court, does not afford ground of presumption against the legality and fairness of the dealings and transactions between the two companies. The two companies were certainly competent to contract the one with the other; and the two directors whose conduct is in question were interested in both companies, and by their relation to and official positions in them, they owed duties, and were hound to he faithful alike, to both. Therefore, while acting within the scope of the powers delegated to them by the stockholders of the corporation, there is no presumption of illegality or unfairness in their dealings and transactions as between the two companies. They were the chosen agents of both; and to he successful in any attempt to impeach the validity of their acts, with a view of making them personally responsible either to the corporation or to the stockholders, there must he distinct charges of misconduct, fully supported by proof. Adams Mining Co. vs. Senter, 26 Mich., 73; U. S. Rolling Stock Co. vs. Atlantic & Great Western R. Co., 34 Oh. St., 450.
This case is altogether unlike that of a trustee, agent, or director, bargaining in a matter of personal advantage to himself individually, with the party reposing the confidence in him, and where it is incumbent upon him to show that a fair and reasonable use has been made of that confidence; as in the cases of the Hoffman Steam Coal Co. vs. Cumbld. Coal & Iron Co., 16 Md., 456; Cumbld. Coal & Iron Co. vs. Parish, 42 Md., 598; Jackson vs. Ludeling,
Such being the requirement of the case, the motive and intent with which the various acts were done, or left undone, by the directors, and charged as fraudulent, become most material.
It has been argued, that Robinson and Shoemaker, being stockholders and directors in the Steam Packet Company, and hearing the same relation to other companies mentioned, designed and intended from the commencement of the connection between the Steam Packet Company and the PoAvhatan Company, to wreck and bring to utter ruin the latter company: That their object in get-
ting the stock in the latter company was either to cripple and bring it to ruin, or to make it entirely subservient to the interest of the other companies in which they were interested. But, upon' careful examination of the evidence, we do not think that the facts proved warrant that conclusion.
The proof clearly shows that the Powhatan Company as re-organized was never strong either in equipment or finances. .The steamers owned by it were bought up after the war in rather a worn condition, and required considerable repair. They were placed in the company after being repaired, for stock, at an exaggerated valuation. The com
In this state of things, one would naturally suppose, if the ruin and utter destruction of the business prospects ■of the company were the results desired to he accomplished, instead of investing a large sum of money in its ■stock, furnishing aid by the loan of money, and by a change in its management, bringing about partial success in its operations, so as to enable it, to a considerable ■extent, to pay off its prior indebtedness, Robinson and ■Shoemaker would have counselled the Steam Backet Company to stand aloof, refuse all aid, and to offer no obstacle to the ruin that seemed to be approaching the Powhatan ■Company. But such was not the course pursued.
Whether Robinson and Shoemaker sought to become interested in the company on behalf of the Steam Packet ■Company, or whether they were invited and urged to that course by those representing the Powhatan Company, is a question upon which there is a conflict of testimony. But the undisputed facts of the case would rather indicate that their introduction into the company was desired ■on the part of the dirctors and those interested in the welfare of the company; for otherwise it is difficult to con
It is also argued, that the fact that the Steam Packet Company advanced money, and took bills of sale or mortgages of the steamers of the Powhatan Company, is proof of the design or intention to get entire control of the property of the latter company, and thus to destroy its. ability to carry on its operations.. But we think no such conclusion can fairly be drawn from that fact, either stand
Down to the spring or summer of 1818, there was entire harmony among the directors, and a full concurrence in all the proceedings of the company. There was no complaint, or objection made from any quarter. Robinson and Shoemaker had been elected and re-elected without opposition; and it does not appear that it had ever been suggested that they had acted, or attempted to act, since being directors, in a manner hostile to the interest of the company, or that they were in any way sacrificing the interest of the company to rival companies in which they were interested. Indeed, being but two in a board of six, they were powerless for any such purpose, even if they had been disposed to such course. It was not until May, 1813, after Clyde had obtained control of the Richmond and York River Railroad, and had come forward with his project of a daily line instead of a tri-weekly line, between Baltimore and Richmond,
In their answers and in their testimony, the two Robin-sons and Shoemaker are explicit and emphatic in denying, 1st, that it was within the power of the company, owing to its want of pecuniary means, to accede to and adopt the proposition, with the conditions involved, to run a daily line to make the connection onYork river; 2nd, that it would have been wise or judicious to adopt the proposition, judging from the results of former experience, even if the company had been in a condition to comply with all the terms embraced in the proposition; and 3rd, that they were actuated, in the slightest degree, hy motives or purpose to do wrong to the Powhatan Company, or that they acted with a view to the interest of other companies. And upon the whole evidence of the case, we discover nothing to justify us in withholding credence of their testimony.
The proposition for. maintaining the daily line hy way of York river, involved three conditions; 1st, that there
The steamer Virgjnia could not, according to the lowest estimate, have been repaired for less than §25,000, and, according to the testimony of several witnesses, full and complete repairs would have cost from $60,000 to $70,000. The price of the Sue was $75,000, to be paid in the stock of the Powhatan Company at a valuation. This proposition, therefore, involved serious consequences to the company, especially in view of the fact of its limited resources, and of the conceded fact, that all prior efforts to maintain daily connection on that line had utterly failed. And in addition to this, there is an absence of apparent motive on the part of Robinson and Shoemaker to act in the matter with any wilful design of doing wrong to the Powhatan Company. That company had never been a serious competitor of the Steam Packet Company, their routes being different. The only company that was affected by the competition of the York river line was the Richmond, Fredericksburg, and Potomac Railroad Compañy; and that company, by the withdrawal of the steamers of the Powhatan Company, was left to compete with the more formidable rival of the Richmond and Chesapeake Steamboat Company, running its steamers in connection with the Richmond and York River Railroad, and in neither of which latter companies had the defendants, Robinson and Shoemaker, any interest whatever.
The charges in regal'd to the change made in the location of the wharf at Richmond, and the failure to repair the steamers of the company, are so fully explained in the
In these transactions, therefore, we fail to find that the ■charges of the hill are supported, or that they afford any sufficient evidence upon the principles of law applicable to the case, for holding the defendants personally liable for fraud or breaches of trust in the management of the affairs of the corporation. We must not fail to observe, however, that there are circumstances in the case that were calculated to excite suspicion, and which tend to give color to some of the charges made in the bill. The strongest of these are the facts in connection with the buying up a controlling amount of the stock of the company in the summer of 1813, and the election of Mr. Kelso as director, he being at that time one of the directors in the Steam Packet Company. This was done, however, in the midst of the contention between Booth and Clyde on the ■one side, and Robinson and Shoemaker on the other, in regard to the proposed daily connection on the York river route ; and with the views of the latter named contestants, as to the inability of the company to conform to the conditions proposed, and the certain failure or disaster that would ensue, if the proposition were adopted, they deemed themselves justified in what was done. Without at all approving their expedients to accomplish their purpose, we discover nothing in this conduct that would justify us in concluding that they were actuated by any fraudulent ■design to bring disaster upon the affairs of the Powhatan
That the company was utterly insolvent, and unable to proceed with its operations, with any prospect of success, at the time the stockholders in general meeting determined to close its affairs, is not disputed; and hence that resolution of itself forms no independent ground of complaint.
It follows therefore that the plaintiffs have failed to support the allegations of their bill in respect of the main ground of relief.
There is one other question remaining to he decided, ■and that is, whether the transaction between the two companies in regard to the steamer Petersburg was an absolute sale, or a mortgage only as a security for the loan of $40,000 ?
The proposition from the Powhatan Company was for a loan of $40,000. This was rejected, in that form, by the Steam Packet Company, but it agreed to advance the ■amount of money requested, upon receiving an absolute hill of sale for the steamer Petersburg, that the Powhatan Company had offered to mortgage. This proposition appears to have been acceded to, the money was advanced, and the absolute hill of sale executed. But there are several circumstances to show, that while the transaction was made to assume the form of an absolute sale, it was in substance, and, according to the understanding and intent of the parties, a mere loan of money,
Being of opinion, therefore, that the hill of sale of the steamer Petersburg must be treated as a mortgage, and not as an absolute conveyance of the steamer, we shall reverse the decree of the Court below and remand the cause, that a proper account may be taken as between the two companies in respect to that transaction. And as to the costs of this suit, we are of opinion, under the circumstances of the case, that they should he paid, the one-half thereof by the appellants, and the other half by the Baltimore Steam Packet Company.
Decree reversed, and cause remanded.