280 Mass. 343 | Mass. | 1932
This is a suit in equity in the name of Crowell & Thurlow Steamship Company by its receiver, Paul J. Bertelsen, against five directors of the plaintiff and the executors under the will of Peter H. Crowell, deceased, who also was a director of the plaintiff company through the period covered by the transactions set forth in the bill. The plaintiff now makes no claim against the estate of Peter H. Crowell. The five remaining defendants will hereafter be referred to as the defendants.
The bill seeks to charge the defendants personally with liability for loss sustained by the plaintiff, hereinafter referred to as the Steamship Company, resulting from certain transactions between that company and the Atlantic Coast Company, hereinafter called the Atlantic Company, of which latter company the defendants were directors and also stockholders. The case was referred to a master whose report does not contain the evidence upon which his findings are based. The answer of the defendants pleaded the statute of limitations, loches and a denial of the allegations in the bill which charged them with voting as directors of the plaintiff in favor of certain investments in stock of the Atlantic Company and in favor of certain loans all because of a personal interest to be served, and also of the charge that the acts of the defendants as directors were negligent and improvident both in the making and in the retention of investments. The defendants appealed from certain orders and interlocutory decrees and from a final decree dismissing the bill against the estate of Peter H. Crowell, and ordering the appellants jointly and severally to pay to the plaintiff the sums of $200,000, $100,000, and $240,160, aggregating $540,160, plus interest from June 2, 1924, to June 9, 1931, totalling $767,027.20.
The following facts are found by the master: The Steamship Company was incorporated under the laws of Maine in 1912, its main purpose being to build, purchase or otherwise acquire sailing vessels, steamships and other vessels, and to operate and deal in the same. No question is raised but that under its charter the corporation had power to make investments of the character of those involved in the
The Atlantic Company was incorporated under the laws of Maine in 1916. Its original paid-up capital was $15,000 on an authorized capital of $100,000, the par value of a share being $100. Each of the five defendants held fifteen shares; four were original directors and one McKenney became a director on June 30, 1917, when the stockholders voted to increase the capital to $2,000,000. This company was prosperous from the beginning, and a dividend of two and one half per cent was declared for each quarter from January 31, 1917, to December 15, 1920, when for the first time it was passed. The net earnings in 1919 from the operation of vessels reached the sum of $731,-965.57. However, in November, 1920, a sudden drop in the demand for shipping of all kinds occurred, with no improvement thereafter, and later proceedings in bankruptcy were instituted, in 1924, and the creditors of the company were paid sixteen cents on the dollar. The plaintiff realized from the sale of the $300,000 note of the Atlantic Company, including interest, $59,840.
The first act of the directors of the Steamship Company of which the plaintiff complains was the investment of $250,000 of its funds in the capital stock of the Atlantic Company. At that time the defendants were directors of the Atlantic Company. As the business of the Atlantic Company was rapidly increasing and its directors believed that more capital was needed, the shareholders of the company met on June 30, 1917, and at the recommendation of the directors voted to increase the authorized capital from $100,000 to $2,000,000, and at the same meeting the following votes were passed: “Voted: To issue
On July 6, 1917, the defendants, as directors of the plaintiff, authorized its treasurer to invest at his discretion in the capital stock of the Atlantic Company the sum of $250,000; at that time the defendants were not only directors of the Atlantic Company but each owned fifty shares, in all two hundred fifty shares out of a total of five hundred shares issued against a cash capital of $50,000 fully paid in, and in addition were entitled to have a proportionate share of a voted stock dividend of three additional shares for each original share, to be issued against increment in value of the original capital invested, for which stock dividend the five defendants had voted a week previously as stockholders of the Atlantic Company. The investment in the shares of the Atlantic Company was not made, however, until January 17, 1918, and in passing upon the propriety of this investment the master considered the financial history of the Atlantic Company up to that time. The Atlantic Company’s stockholders, upon voting to increase the number of its shares from one thousand to twenty thousand, of which fifteen hundred were to be issued and were issued to the stockholders of record on July 14, 1917, as a stock dividend, also voted that eight thousand shares of stock be sold at par ($100).
Immediately after the defendants met on July 6 as directors of the plaintiff, they adjourned and reassembled as
It is settled that corporate funds can be used only for corporate purposes. American Agricultural Chemical Co. of Massachusetts v. Robertson, 273 Mass. 66, 83, and cases cited. In form this transaction was the use of corporate funds for corporate purposes as the plaintiff had power under its charter to invest in the stock of other corporations. It is a possible view of the evidence that the defendants voted to purchase the shares in the Atlantic Company ostensibly as an investment of the plaintiff’s funds, but that their real intent and purpose were not as an investment for the plaintiff but for the purpose of assisting the Atlantic Company in expanding and increasing its business so that their shares in that company would be more valuable. If that was their intention, it would be an improper use of the plaintiff’s
The master who saw the witnesses and heard their testimony was in a better position to judge of the purpose of the defendants in making this investment than we can possibly be with only the printed record before us. In the master’s summary óf his findings under the heading “Conclusions” he states in paragraph 4 that “Upon the first of these issues I am convinced by a careful consideration of all the evidence before me, that all the defendants in voting to invest the funds of the Steamship Company in the Atlantic Company in the three instances of which complaint is made, and in their subsequent action with reference to these investments, were acting in good faith and in accordance with what they deemed to be both for the interests of the Steamship Company and a proper and a reasonable use of its funds. They had made a success of the Steamship Company and believed that they could make a like success of the Atlantic Company in a somewhat different field where they considered that there was abundant opportunity for large profits. Bankers and business men in general agreed with them. Few if any shipping men or bankers seem to have foreseen the disaster which overtook all business in shipping in and after 1921. The defendants were enthusiastic to assist in reestablishing and developing an American Merchant Marine, a project which had long been in the minds of shipping men upon this seaboard. The Steamship Company had a large surplus and funds not immediately needed in its business. It was a reasonable business venture for it to invest a portion of these funds in the construction and operation of sailing vessels. It was anticipated by all persons concerned that as the proposed fleet of the Atlantic Company was completed and put into operation the stock would prove a very profitable investment and its loans would be rapidly paid off out of earnings. This had been precisely what had happened in the Steamship Company.”
The second investment of $100,000 in stock of the Atlantic corporation under a vote of the defendants was made November 20, 1918. The same amount had been previously lent by vote of the defendants to the Atlantic Company. This purchase of stock was paid for by cancelling a note of the Atlantic Company. The note was guaranteed personally by the defendants Thurlow, Jones, Peirce and Noyes and another director of the Atlantic
The third act respecting which the plaintiff complains was a loan of $300,000 which the defendants made on November 19, 1919, on its demand note and secured by twenty-five hundred shares of the Atlantic Company’s own stock then unissued, together with eleven hundred fifty shares of stock of the Steamship Company which were found to be worth about $100,000. The master found
After June 18, 1919, pursuant to the votes of the directors and shareholders of the Atlantic Company to increase its capital from $2,000,000 to $3,000,000, $2,500,000 was issued and $500,000 was still unissued. By October, 1919, the loans of the company for construction purposes amounted to $545,000; its paid-in surplus resulting from the stock
As to the loan of $300,000 by the defendants to the Atlantic Company the master states: “Nor can I draw any such inference of bad faith from the nature of the collateral accepted as security for this note. I agree that the use of the twenty-five hundred shares of unissued stock of the Atlantic Company was a rather stupid performance. Not having been issued, it had no value, and in any event being stock in the debtor company, it represented a claim against the assets of that company inferior to that represented by the note which it was to secure. So far as appears
The master did not determine whether in making the investments the defendants as directors of the Steamship Company failed to exercise sound judgment. He states that it was not contended by the plaintiff that ordinary negligence of the defendants would subject them to liability; that he regards that issue as immaterial. “Solely as a conclusion from the facts and findings stated by me, I find that
It is found that the stock of the Atlantic Company was worth the price paid for it by the Steamship Company when it was acquired by that company, but if the defendants had not authorized the profit of $118,660 by issuing this stock to themselves and to the other stockholders, the proportionate assets of the Atlantic Company represented by each share of its stock would have been larger at the time of each issue to the company. “This increase in value would of course have enured to the benefit of all shareholders in that company then owning or thereafter acquiring its stock. Immediately after the first issue of stock to the Steamship Company it owned twenty-five hundred shares out of a total of eighty-five hundred shares then outstanding, and immediately after the second issue it owned three thousand shares out of a total of twelve thousand shares then outstanding. When the Atlantic Company was liquidated the Steamship Company owned three thousand shares out of a total of thirty thousand shares then outstanding.”
It is obvious from these findings that the defendants felt that the investment of the surplus funds of the plaintiff in the purchase of the stock in the Atlantic Company and the loan to it would be a safe and sound investment and would strengthen the plaintiff’s investment in the stock of the Atlantic Company. The master reviewed the subsequent history of the two companies, and his findings are consistent with his conclusion that no inference of bad faith on the part of the defendants can properly be drawn from that history. If the bill can be construed as charging negligence on the part of the defendants in the investments made and in thereafter retaining them, we are of opinion that no inference of negligence on the part of the defendants can properly be drawn although the master expressly states that he did not regard that issue as material and did not pass upon it. As to this statement, it does not appear that the plaintiff made any objection to it. It is settled that it is within the power of this court to make additional or different findings of fact
The burden rests upon the plaintiff in the case at bar to prove bad faith or lack of sound judgment, negligence or other actionable wrong on the part of these defendants. Meyer v. Fort Hill Engraving Co. 249 Mass. 302. Calkins v. Wire Hardware Co. 267 Mass. 52. Columbian Insecticide Co. of Boston v. Driscoll, 271 Mass. 74, and cases cited at page 78. Most of the cases where mismanagement and misappropriation of funds were charged were cases where express trustees or fiduciaries other than directors were involved.
Although the master does not determine the questions whether in making the investments the defendants failed to exercise sound judgment and were negligent, we are of opinion that they were material issues to be determined. But upon the entire findings it is plain that the plaintiff has failed to sustain the burden of proving either. In this connection the master states that it is not contended by the plaintiff that “ordinary negligence on their part would subject them to liability in this case.” We understand that apart from negligence the plaintiff contends that in making the three investments complained of the defendants acted in bad faith and failed to exercise sound judgment and reasonable and prudent discretion. We are of opinion that, in view of the financial history of these two companies as outlined by the master in detail, a finding would not be warranted that the defendants in making the investments of the plaintiff’s funds in the Atlantic Company acted in bad faith or failed to exercise sound judgment. Nor does it appear that they acted in
The history of the Atlantic Company subsequent to the sudden falling off of its business in 1920 will not warrant a finding that the defendants failed to perform any fiduciary duty which they owed the plaintiff or that they should have quickly sold the Atlantic Company stock and demanded payment of the note and made sale of the stock as collateral. It is held that transactions between corporations having directors in common, and in which the directors are personally interested, are not invalid as matter of law. Union Pacific Railroad v. Credit Mobilier, 135 Mass. 367, 377. Corsicana National Bank v. Johnson, 251 U. S. 68, 91. Geddes v. Anaconda Copper Mining Co. 254 U. S. 590, 599. Hence the defendants are not in the position of having paid out money in pursuance of acts which were null and void and upon which a liability may be predicated.
The master after dealing at length with the questions presented summarizes his findings in the following statement: “From the foregoing findings it seems to follow that the defendants did not commit any breach of their fiduciary duty to the Steamship Company in determining to make from its funds investments of this character and amount in the Atlantic Company. It does not follow, however, that they were warranted in making the investments in the stock of the Atlantic Company in the precise manner in which they were made or that they obtained for the Steamship Company the full proportionate interest in the Atlantic Company which under all the circumstances it was entitled to receive for the money which it paid. Upon this issue the facts relating to the stock which they and their associates received as a stock dividend and in payment for property sold to the Atlantic Company just
In determining whether the defendants failed to exercise good faith in valuing the property against which the stock dividend was declared by the Atlantic Company, and in purchasing the assets of the Townsend Company for the sum of $75,000 for which Atlantic stock was to be issued, it is to be noted that both transactions occurred prior to the time the first investment in Atlantic stock was made, and that the stock dividend vote was passed a week prior to the time of the votes of the directors to make such an investment. The master found that the defendants as directors had overvalued such property “not intentionally” but “without giving serious or reasonably careful consideration to the actual facts and without attempting to exercise sound judgment.” “Solely as a conclusion from the facts and findings stated” he found that “the defendants, other than Captain Crowell, in their acts and votes relating to this stock dividend declared . . . and to the purchase of the assets of the Townsend Company by it did not exercise good faith toward the Steamship Company,” the result being that the defendants and their Atlantic associates “made a total unwarranted profit of $93,660 from the stock dividend, and that these defendants and the other stockholders of the Townsend Company then made an unwarranted profit of $25,000 in connection with the purchase of the assets of that company”; that “No part of this profit was, however, ever actually realized ... in cash .... They did however receive this profit in stock actually worth this amount at the time and until December, 1920, regularly received dividends upon the same at the rate of ten per cent per annum.” The master further found as follows: the increase in value of the assets of the Atlantic Company of $150,000, adopted as the basis of the stock dividend of June 30, 1917, was justified only to the extent of $56,340. It was “unwarranted to its full extent by the actual value of the property”; the “defendants did not intentionally overvalue these assets. Some increase in value was justified and the directors . . .
It appears from the master’s findings that the defendants were men of mature age, with large experience in dealing with business corporations; that four of them were familiar with the shipping industry, and had frequently made invest
The issuance of the stock dividend was based upon an increase in value of the following items: one hundred fifteen shares of stock of the Steamship Company $4,775, schooner “Jessie G. Noyes” $45,000, fifteen vessels under construction $17,725, lumber and material at Thomaston plant $47,275, plant at Thomaston $35,225, making a total of $150,000. The master found that the increases in value adopted as the basis of the stock dividend vote were justified only to the following extent: one hundred fifteen shares of Steamship Company $4,775, parts of fifteen schooners $17,725, schooner “Jessie G. Noyes” $22,840, Thomaston plant $11,000, a total of $56,340. It thus appears that the master found the increase in value of the schooner “Jessie G. Noyes” was excessive to the amount of $22,160, that the increase in value of the Thomaston plant was excessive to the amount of $24,225. As to the lumber and materials at Thomaston the master states that the defendants have not sustained the burden of showing that there was justification for any increase in value to the extent of $47,275; he therefore does not find that there was any increase under this item.
The defendants made no profit out of the Atlantic Com-
Upon the foregoing findings relating to the increase in valuation of the assets of the Atlantic Company and the purchase for $75,000 of the assets of the Townsend Company, the question for this court to decide is whether the conclusion of the master is warranted that in these two transactions the defendants did not act in good faith. The fact that the various items which totalled an increase of $150,000 in the assets of the Atlantic Company were not separately estimated but were considered as a round sum, or the circumstance that an independent appraisal was not caused to be made by persons other than the officers of the company, would not warrant a finding that the defendants as officers of the corporation failed to exercise good faith. The master expressly finds that the defendants did not intentionally overvalue the assets. They were men of experience and as stockholders and directors of the plaintiff they were financially interested in both corporations.
It was held in Lyman v. Bonney, 118 Mass. 222, where the directors of a corporation were charged with the misapplication of its funds and the master found that the directors did not exercise proper care, that these findings “do not support the allegations necessary to maintain the bill .... They [the directors] are not responsible for mere errors of judgment or want of prudence in conducting or closing up its business.” Fillebrown v. Hayward, 190 Mass. 472, 475, 477 — 178. Abbot v. Waltham Watch Co. 260 Mass. 81, 96. Brown v. Little, Brown & Co. (Inc.) 269 Mass. 102, 117. In view of the subsidiary findings of the master, we are of opinion that the ultimate findings that the defendants as directors of the Atlantic Company failed to give careful consideration to the facts, that they did not exercise sound judgment, and did not exercise good faith in valuing the assets of the Atlantic Company and in purchasing the assets of the Townsend Company cannot properly be sustained. It is plain from the findings relating to the investment of funds of the Steamship Company to the amount of $250,000 in stock of the Atlantic Company, the loan of
It results that the final decree must be reversed and a decree entered dismissing the bill with costs.
Ordered accordingly.