Butts v. Wood

| N.Y. Sup. Ct. | Sep 1, 1862

By the Court, Johnson, J.

Upon a careful examination, of all the evidence in the case, I am satisfied that the finding of the referee “ that it was understood by the parties upon the passage of the resolution of December 1855, and for a considerable time afterwards, that no compensation was to be allowed, for services as secretary and treasurer, beyond what was provided for in the resolution,” is not without sufficient evidence in the case to sustain it. It follows, of course, from this, and the other facts, found by the referee, that the company, at the time the resolution of the three directors was adopted, to pay the defendant Daniel Wood the sum of $933.33, for the pretended service, was not indebted to him for such service. The question then arises, whether the matter can now be inquired into and an action maintained to redress a wrong of this description. The claim was presented at a regular meeting of the board of directors, at which a quorum was present, duly authorized to do any lawful act and to bind the company thereby, if within the scope of the powers of the board of directors. The claim thus presented was allowed, and paid, and it is claimed on the part of the defendants that that is a final end of the matter, and that the courts cannot now inquire into it, to correct it. This depends upon the question whether the transaction was in its character fraudulent, and in the nature of a breach of trust. If it was, the court has ample power to investigate the transaction, through all its bearings and relations, and redress the wrong. The relation in which these defendants stood, to the other stockholders, was that of trustees of the funds then in their hands, or in their treasury. And if they paid over these funds to a person upon a pretended claim, which they knew, or must be presumed to know, was wholly unfounded in law, it was clearly a breach of trust on their part. The relation between directors of a corporation, and its stockholders, is that of trustee and cestuis que trust. In this case, the defendants being directors, constituting a majority of the board, and necessary parties, it is just the case where the action may be maintained by a stockholder, in his own behalf, and in behalf of the other stockholders. (Ang. & Ames on Corp. 304, 305, 3d ed. Robinson v. Smith, 3 Paige, 222, Scott v. Depeyster, 1 Edw. Ch. 513. Cumberland Coal Co. v. Sherman, 30 Barb. 553. Cross v. Sackett, 16 How. Pr. Rep. 63.)

All the cases show that directors are not liable in such actions, unless bad faith can be imputed. This case, in principle, is quite analogous to that of a trustee selling trust property and becoming himself the purchaser in his individual right, which the law will adjudge fraudulent. Wayne, J., in Mechond v. Girod, (4 How. U. S. R. 553,) says, “ the rule of equity is, in every code of jurisprudence, with which we are acquainted, that a purchase by a trustee, or agent, of the particular property of which he has the sale, or in which he represents another, whether he has an interest in it or not, per interpositam personam, carries fraud on the face of it.” He further says : “ The general rule stands upon the great moral obligation to refrain firm placing ourselves in relations, which ordinarily excite a conflict between self-interest and integrity.” The law recognizing the necessary presence of self-interest in the mind, and its general tendency, and the possibility of its preponderance, cannot allow the transaction to stand, but will set it aside without any other or further evidence of fraud. It provides against the danger in any case, by a general prohibition. It is upon this principle that the law excludes judges and jurors from sitting in cases in¡ which they are parties, or have any interest, or stand in certain relations to either of the parties. It takes away jurisdiction from the judge in all such cases, and annuls his judgments. In one aspect, this case corresponds to that of a judge, or jury, sitting in his own case. The claimant was one of the directors, and without his vote in the board the claim could not have been allowed and settled. Another of the defendants was his father, and the other a relative. The transaction challenges the most jealous and severe scrutiny, even if there was legal color for the claim. But as there was in fact no legal claim, the court is in duty bound to pronounce this disposition of the funds of the company, thus made, fraudulent and void, as against the other stockholders. It is a clear abuse of trust, and should not be allowed to stand.

[Monroe General Term, September 1, 1862.

I am unable to perceive any valid objection to the judgment, in form or substance. It declares the action of the board fixing the compensation for the alleged services void, and the payment of the sum so fixed unauthorized and illegal, and decrees its repayment to the company for the benefit of, and distribution among, the stockholders thereof.

It does not decree distribution absolutely, but only declares the general purpose for which the repayment is to be made. Leave is therein given to apply to the court for further directions in that respect.

On the whole, I think there is no error, and that the judgment must be affirmed.

Johnson, Welles and J. C, Smith, Justices.]