139 N.Y.S. 253 | N.Y. App. Div. | 1912
Lead Opinion
This is a representative action brought by minority stock- . holders. The complaint charged a fraudulent conspiracy prior to January 20, 1908, to oust plaintiff W. C. Carr from the directorate and from the service of the defendant, the BrounGreen Company, and thereafter to waste the net assets of the Kcompany in payment of excessive salaries and wages, and sought recovery from the directors of alleged excesses of salaries and wages paid to officers and employees of the company in 1908 and 1909, after Carr’s ouster.
• The judgment of June 30, 1911, which this' court in a former opinion (151 App. Div. 928) declared to be interlocutory, provided that the certain resolutions of the board of directors in 1908, 1909 and' 1910 fixing salaries be rescinded; that the defendants Kimball, Winnemore and Lawton pay to the company the sum of $12,180, being the difference between the sum of $28,580.30 paid to Kimball as president, Winnemore as vice-president and secretary, and Ward as treasurer from January, 1908, to December 31, 1909, and the sum of $16,400, the fair and reasonable value of their services at $5,000, $2,200 and $2,000 a year respectively; and that said defendants account for the difference between the sums paid to Kimball, Winnemore and Ward from January 1, 1910, to the date of the judgment
A referee was appointed, an accounting had, and by the judgment of March 28, 1912, the report of the referee was confirmed and it was adjudged that Kimball, Winnemore and Lawton pay to the corporation the further sum of $9,005 with interest. From these judgments Kimball, Lawton and the corporation appeal. The action was discontinued as _ to Byan before the trial and Winnemore does not appeal.
The following facts were found by the learned Special Term: Prior to the year 1894 a partnership known as Broun-G-reen & Adams was engaged in the stationery business in the city of New York. In said year the corporation Broun-G-reen Oompany was formed under the laws of the State of New York which succeeded to the business of said partnership. Its capital stock was $50,000, divided into 500 shares of the par value of $100 each. In 1895 the defendant Horatio G-. Kimballr acquired, and has ever since owned, a majority of the stock. On July 1, 1895, Kimball was elected secretary and treasurer, and became the executive head of the corporation, having been president and a director from 1896 to the present time. In 1897 the plaintiff Walter 0. Carr entered the employment of the corporation, and thereafter and until January 20, 1908, remained in its employ and devoted his time solely to its business and interests. In 1899 he was elected a director and secretary and treasurer, and continued so until January 20, 1908. Said Carr devised and built up a very successful and profitable branch of business, namely, furnishing corporation outfits and supplies. This was an entirely new line in the defendant company’s business, and for many years past has constituted over fifty per cent thereof. On January 2, 1900, Kimball and Carr entered into a written agreement for the pur
These salaries were in substantial proportion to their stock»; holdings, were distributions of profits in the guise of salaries, and were not designed to be, and were not, the fair and reasonable compensation for their services. During the period from 1900 to 1907 the corporation made distributions of its profits to its stockholders on their stock under the name of “ extra compensation,” in lieu of dividends, but said extra compensation was based on stock ownership precisely as dividends are based. During those years no dividends were distributed except that in 1906 and 1907 dividends of six per cent were declared to avoid making a report to the State Comptroller. These dividends, in addition to “ extra compensation ” were distributed to its stockholders. From 1900 to 1907, inclusive, the board of three directors consisted of Kimball, Carr and Lawton, Sr. Lawton held the five qualifying shares alluded to, but he never attended a directors’ meeting, or took any part in the affairs of the corporation, and was never consulted as to the salaries to be voted, or drew dividends on the shares standing hi .his name, which were drawn by Kimball. During said period Kimball completely controlled and determined the amounts to be drawn by the officers and employees as salaries. During said period the corporation was in effect conducted in respect to the distribution of profits and salaries to Kimball and Carr as a partnership, in which the former held a three-fifths interest and the latter a two-fifths interest.
In 1906 Carr sold to defendant Ryan twenty-one shares of his stock and Kimball sold to him twenty-six shares of his. In January, 1907, Lucretia C. Carr; wife of Walter C. Carr, acquired five shares. Plaintiff W. C. Carr now owns one hundred and seventy-five shares, plaintiff Lucretia Carr five shares, defendant Kimball owns two hundred and fifty-three shares, defendant Winnemore twelve shares, Lawton five shares and Ryan fifty shares. In January, 1905, Kimball attempted to reduce Carr’s salary and to raise his own to $9,000 a year. Carr refused to consent and. did not sign the minutes purporting to authorize such increase until after Kimball consented that his salary and that of Carr should be for 1905 $7,500 and
The court specifically found: “That in or about the year 1905 said Kimball wrongfully' and fraudulently formed the plan of depriving plaintiff Walter C. Carr of all connection with defendant corporation, of obtaining complete control thereof and voting himself as its President a grossly excessive salary and a much greater salary than he had previously drawn.” It was further found that defendant Richard M. Lawton is a relative and close personal friend of defendant Kimball and is the holder of five shares of stock which he acquired shortly before January 20, 1908, from said Kimball as a gift to qualify as director; said shares were held theretofore by Richard Lawton, Sr., the father of said Richard M. Lawton, who had been a director from 1900 to 1907, inclusive. Prior to January 20, 1908, defendants Kimball, Winnemore, Lawton and Ryan, owners of record of three hundred and twenty shares-of the capital stock- of the defendant company, conspired to use their control of the majority of its stock to exclude Carr from the employ thereof, and the plaintiffs from representation on its board of directors, from- influence in its' management and from information as to its assets, business and affairs; and thereafter to waste and dissipate the net assets and profits of the company and to defraud the said company by divérting the same to the payment to defendants Kimball, Winnemore and Ryan and to other employees of said corporation of salaries greater than the fair and reasonable value of the services of such persons to be rendered to said corporation. By the unanimous vote of the stock held by said Kimball, Winnemore,- Ryan and Lawton, defendants Kimball, Winnemore and Lawton were elected directors on the 20th of January, 1908, re-elected in 1909 and 1910,
In and by the said resolution, defendants Kimball, Lawton and Winnemore authorized the payments of the increased salaries,
The case presents an illustration of that form of industrial development where a business partnership is transformed into a small and close business corporation, and, so long as harmony exists among its members, is conducted practically as a copartnership.; but when dissension and disagreement arise, the majority attempts to oust the minority, not only of control, but of a fair return upon.the investment. Instead of treating all the stock alike and distributing the profits fairly and proportionately by way of dividends, the majority first elect themselves directors, then as directors elect themselves officers, and then distribute among themselves a substantial part of the profits in the way of excessive salaries, additional compensation and other devices. . The legal difficulty to the final accomplishment of these purposes lies in the well-settled proposition that the directors are trustees of the corporation and for all the stockholders and may not deal with themselves for their own benefit to the detriment of the corporation and the minority who, by a representative action, may cause the sums improperly taken to be returned to the treasury. The following cases sufficiently establish the trustee doctrine in this State.
In Butts v. Wood (37 N. Y. 311) the action was brought to set aside the proceedings of the defendants as directors in voting to the defendant Wood extraordinary compensation for his alleged services as secretary and otherwise. At the meeting of the board when the resolution was passed there were present three of the five directors, the three being the defendant, his father and a kinsman. The court said: “ This board, as thus constituted, had no authority to entertain the bill in question, or to do anything in relation to it. * * * The claimant was disqualified from acting, because he could not deal with himself, and without him, there was no quorum of the directors, and they had no authority to transact business. The relation existing between Daniel Wood and the corporation was that of trustee and cestui que trust. * * * The rule that one holding .a position of trust cannot use it to promote his individual interests by buying, selling; or in any way disposing of the trust property, is now rigidly administered in
In Kelsey v. Sargent (40 Hun, ISO), an action by stockholders to set aside notes made by officers of a company, who were also directors, in payment of salaries voted for by themselves, Mr. Justice Haight said: “ The question is thus sharply presented as to whether or not the directors of a corporation have the power to bind the stockholders to pay such salaries as they by resolution see fit to vote themselves. * * * In the case of Coleman v. Second Avenue Railroad Company (38 N. Y. 201) the general rule was stated to the effect that directors, acting as directors and composing a majority of the board, could not make a bargain with themselves binding upon the company. * * * Without stopping to determine the question as to whether or not the board of directors have the power, by resolution, to vote salaries to one or more of their own body, we are clearly of the opinion that such salaries so voted are not binding upon the company when the director in whose favor the salary is voted is present participating in the proceeding.”
In Copeland v. Johnson Mfg. Co. (47 Hun, 235) Daniels, J., in an action to recover an assigned claim for salary, said: “ A director or trustee of a corporation is disabled from stipulating or agreeing in behalf of the corporation and of himself for a benefit from it to himself. He acts in the capacity of a trustee * * *. And as he sustained that relation to the company he could' not bind it by agreements securing or obtaining these beneficial results for himself.”
The rule is stated in Sage v. Culver (147 N. Y. 241): “When it appears that the trustee or officer has violated the moral obligation to refrain from placing himself in relations which ordinarily produce a conflict between self-interest and integrity there is in equity a presumption against the transaction, which he is required to explain.”
In Bosworth v. Allen (168 N. Y. 157) the court said: “ While courts of law generally treat the directors as agents, courts of equity treat them as trustees and hold them to a
. Jacobson v. Brooklyn Lumber Co. (184 N. Y. 152) presents many of the features of the case at bar. It was a representative action brought by minority stockholders to recover for the corporation from the individual defendants amounts received by them for salaries as officers of the corporation and to cancel any and all resolutions purporting to authorize said individual defendants to credit themselves with certain amounts of accumulated or deferred salaries. When the corporation was organized there were five stockholders, all of whom became directors, and the salaries- paid to the officers were moderate. Subsequently the board of directors was reduced from five. to three, the plaintiff was ousted from his office and the board consisted of Verity, who was made president, and Robertson, who was made vice-president and treasurer, and a brother of said Robertson who owned five shares. A resolution was thereupon adopted fixing the salaries of the president and the Vice-president at $8,000 a year each. Notwithstanding thó trial court found as facts that Robertson and Verity'had been officers since its organization, had devoted all their time to its business and the .company was in a prosperous condition' as a result of their management and that the increases in salary were legitimate and commensurate with the increase in business and resulting profit, the Court of Appéals ■said: '“The findings which' it is claimed justify their acts in só taking' and' crediting1 ‘ to themselves increased salaries are •in Substance that the net assets of the corporation have' not
In Miller v. Crown Perfumery Co. (57 Misc. Rep. 383, modified and affd., 125 App. Div. 881) the plaintiff and the two defendants were originally incorporators of the company, each holding one-third of the shares of capital stock and for a number of years each participated equally in the distribution of profits. Subsequently, by reason of a disagreement with the plaintiff, the two individual defendants sought to deprive the plaintiff of the equal participation in the profits to which his holdings of stock entitled him, the method adopted being, first, a refusal to re-elect him as a director and officer of the company; then, as directors the two defendants voted to themselves, by way of salaries, the profits made. The court rescinded the resolutions and directed the repayment of the amounts received thereunder to the corporation, saying: “The defendants * * * meeting as a majority of the board of directors, passed the resolutions in which they were interested, voting to themselves the property of the corporation as salaries. They thereby dealt with themselves as trustees
In Davids v. Davids (135 App. Div. 206) three directors owned all of the stock of the company except the shares owned by the plaintiff. They elected themselves officers and fixed a salary of $8,000 for each. For some years prior to the passage of the resolution the salaries had been very moderate. Mr. Justice McLaughlin" said: “ It is difficult to see how the plaintiff could have made out a stronger case of fraud. The capital of the company was * * * only $30,000 and the three directors were the only stockholders, except the plaintiff, who owned one-sixth of the stock. They met and voted themselves this large increase in salary by a single resolution in which they all concurred. As directors they held a position of trust. It was their duty to manage the business and affairs of the corporation honestly and with fidelity, having in view not only their own interests, but the interest of the plaintiff. Simply because they happened to hold a majority of the stock, which enabled them to elect themselves directors,. and that they constituted all of the directors, gave them no right to vote themselves salaries. * ■* * Salaries cannot be voted "under such circumstances, and when so voted and paid, the money can be recovered back for the corporation at the suit of an aggrieved stockholder. * * *
“ It is also urged on the part of the appellants that the plaintiff failed to prove the salaries voted were excessive and that the bad faith of the directors cannot be presumed. The suggestion is based upon an erroneous assumption as to the precise relation in which the defendants, as directors, stood to the corporation. They occupied a position of trust and when the fact appeared that they had voted themselves salaries by a resolution in which they all joined, then they were put in the posi
There is another set of cases which, while fully sustaining the proposition that directors are trustees incapable of con-tracking with themselves, and that such purported contracts are- voidable at the suit of the corporation, or a minority stockholder suing in a representative capacity, nevertheless recognize a tendency in modem times towards the formation of those small business corporations and realizing that those most interested and holding practically all of the stock will in all probability become the directors and officers' thereof, take the view that, while the contract is voidable, nevertheless the officer who has done the work by which the corporation has benefited is entitled to receive pay on the theory of quantum meruit. The rule is, however, that the burden is upon the director officer to show the fair and reasonable value of the services rendered.
In MacNaughton v. Osgood (41 Hun, 109) Landon, J., said: “The corporation has received, in consideration, the valuable
Fitchett v. Murphy (46 App. Div. 181) was an action brought by a minority stockholder to restrain defendants from paying to themselves certain salaries claimed to be exorbitant. The trial court found as matter of fact that the salaries were voted and paid as a method of division of earnings and not as compensation for services and that under this method all the stockholders were paid -in proportion to their holdings of stock, that these payments were not for services to be rendered and that services were not rendered as an equivalent for them. Mr. Presiding Justice Goodrich, with whom Culler, Bartlett, Hatch and Woodward, JJ., concurred, said: - “This is one of those cases where the majority of stockholders have entered into a combination to control the affairs of the corporation for. their own benefit and in fraud of the rights Of the minority. Such a combination will always be rebuked by a court of equity. It is not necessary to restate well-settled principles upon this subject. * * * Ho action by the directors, and no combination among any of them can be permitted to invade the rights of the plaintiff and the minority stockholders in the corporation. So long as all the parties in interest, incorporators, stockholders, directors and officers, assented to the scheme for the distribution of assets by the payment of salaries, the plan was unobjectionable. * * * It is not difficult to discover a plan to ‘ freeze out ’ Fitchett and exclude him from all benefits, except such as might be derived from the payment of dividends.. * * * It does not appear that they, [the .defendants] .rendered any services as officers sufficient
These cases flatly support the judgment at bar in so far as it requires the repayment of the salaries voted by the directors to Kimball and Winnemore, themselves directors and officers. Indeed the said appellants ought not to complain, because they have been permitted to retain what the court has determined was a fair and reasonable amount for the services rendered, and as in the Davids Case (supra), as the plaintiff has not appealed, that part of the judgment will not be disturbed. To avoid the effect of these authorities the learned counsel for the appellants makes an elaborate argument upon what he calls the Jurisdiction Principle. Stated tersely, it is that,'* because the by-laws provide that “The salary or compensation of all officers, employees or agents of the company appointed by the Board of Directors shall be fixed by the Board,” the courts have no authority to disturb the deliberate decisions of the board of directors made in the exercise of its lawful powers. He cites a- long line of cases as to the power to interfere with the discretionary powers of public officers and boards. Needless to say he cites no case holding that a court of equity is powerless to investigate the transactions of a trustee dealing with himself, or a board of directors voting salaries to its members. He says that in none of the cases cited by respondents was there any such by-law. He is mistaken. In the leading case of Jacobson v. Brooklyn Lumber Company (184 N. Y. 152) there was a similar provision. In McConnell v. Combina
The laws of this State have always conferred upon corpora- . lions the power to appoint such officers and agents as its business shall require, to fix their compensation and to make by-laws not inconsistent with any existing law* Yet, with such provisions in force, the courts have again and again said: “It is against public policy to allow persons occupying fiduciary relations to be placed in such positions as that there will be constant danger of a betrayal of trust by the vigorous operation of selfish motives. The rules upon this subject are illustrated in many cases.” (Earl, J., in Barnes v. Brown, 80 N. Y. 527, 535.) We cannot accept the proposition that by
the adoption of such a by-law, a'corporation, its directors and its affairs, can be divorced from the well-established equity jurisdiction. We cannot believe- that during all the years the courts have been elaborating and strengthening the fiduciary principle for the protection of stockholders, they were oblivious of' the controlling jurisdictional principle propounded by appellants, which, if it exists, nullifies and destroys the fiduciary. . .
We think, however, that the judgment should be modified. We see no ground for holding Lawton for the amounts found erroneously paid to Kimball and Winnemore. While he was a director he was not an officer and did not himself draw a salary or. benefit by his own votes. There is also no reason why the defendants should be held responsible in this action for the increase of salary of the treasurer, Ward: He was not a director and his connection with the company was contractual. It is the breach of duty as fiduciaries in dealing with themselves that receives the condemnation of the court. There is no such principle involved in fixing the salary of an eihployee of the company, not a director. ' We are of the opinion that the judgment should be modified in so far as it holds the defendants responsible for the excess payment to Ward of $190 a year, and that the injunction should also be
We have examined with care this voluminous record and the briefs. We are satisfied that the findings necessary to sustain so much of the judgment as is hereby affirmed are supported by the evidence. We regret to say that in the appellants’ brief an attack is made upon the attorney.for the respondents, claiming such collusion with one of the defendants as ought to vitiate this judgment. We think that there is no foundation for the charge and that the claim is totally unwarranted.
The judgment, modified, as indicated, should be affirmed, with costs and disbursements to the respondents.
Ingraham, P. J.,. and McLaughlin, J., concurred; Laughlin and Scott, JJ., dissented.
See 10 Cyc. 790.— [Rep.
Concurrence Opinion
Judgment modified as indicated in opinion, and as modified affirmed, with costs to respondents. Order to be settled on notice
Dissenting Opinion
For the reasons stated by me in Oodley v. Crandall & Oodley Co. (153 App. Div. 697, 717),' decided herewith, I am of opinion that the judgment appealed from should be affirmed in its entirety, and that the directors should be held liable not only for the moneys illegally voted to themselves and received by them, but also for the moneys similarly paid to others, through their/ action. I am not disposed to limit the responsibilities of directors to liability to account only for moneys of the corporation which they have actually received themselves. It is not, only the ‘‘ breach of duty as fiduciaries in dealing with them-) selves that receives the condemnation of the court,” but the breach of duty in dealing with the property and funds of the] corporation. That they themselves profited by their own acts is only a circumstance going to establish the mala fides of the transaction.