160 N.Y.S. 256 | N.Y. App. Div. | 1916
Lead Opinion
In form this action is for an accounting. It is brought by plaintiff as a stockholder of the defendant corporation both in an individual and representative capacity.
By his complaint the plaintiff charges the unlawful appropriation of property and money of the brewing company by the defendants Burgweger and Bartholomay. He attacks many transactions and seeks herein an accounting by such individual defendants and restitution to the corporation.
Since the organization of the brewing company the defendant Burgweger has been its president. He has devoted substantially his entire time to its business. Commencing at $2,000 per year, his salary has been gradually increased until in July, 1907, he was receiving $7,000 per year. Such increases to that amount are not questioned in this action.
Bartholomay, about 1903, came into the employ of the corporation as a salesman. His salary began at $3,000, but coupled with it was an agreement that in case under his supervision the sales showed certain increases his salary should be increased to $5,000. The business did show this increase, and in July, 1907, the board of directors voted the payment to him of such increased salary from September, 1903.
At the same time a resolution was adopted by such board further increasing Bartholomay’s salary to $10,000 per year and likewise increasing Mr. Burgweger’s salary to the same amount. In such attempted increase in salaries lies one of the chief grounds for complaint urged by plaintiff.
It was conceded upon the trial that this resolution was ineffectual to increase to $10,000 the salary of each of the individual defendants, for the reason that their own votes were essential to the adoption of that measure.
It has been held by the Special Term that the increase in salary to Mr. Bartholomay to $5,000 was lawful, being predicated upon a contract lawfully made at the time of his employment and fully performed by him. The lawfulness of that contract, and the power of the corporation to make it, cannot be questioned. The determination of the court below that Bartholomay performed this contract has support in the record. The corporation has received the benefit of that contract and must be held to have adopted and ratified it. As to such increase up to $5,000 we must sustain the Special Term.
While it is not sought upon this appeal to justify the increases to $10,000 under the resolution of July, 1907, yet it is claimed that the services performed by the defendants Burgweger and Bartholomay were of the value of such increased salaries, and that the performance of such services for the corporation made an implied promise on the part of the corporation to pay therefor the reasonable value of such services. This contention presents the question of the application of the so-called quantum meruit rule to the facts in this case.
Starting with the premise of invalidity of the resolution of July, 1907, we must admeasure the rights of these parties as though that resolution had not been adopted. Then we have these men performing certain specific duties under a contract whereby they were to receive therefor a stated and contracted compensation. Without other action than their own, without ratification from the stockholders, and without (so far as this record shows) any increase in or modification of their duties, they seek to take substantial increases in salary from the assets
That officers of a corporation may not, by action on their own part, increase their own compensation without a corresponding increase in duties is fully sustained by Jacobson v. Brooklyn Lumber Co. (184 N. Y. 152).
In that case an increase in salaries was voted without additional duties or services. The Court of Appeals there unanimously held such increases to be unlawful, even though attended by increased assets and better financial standing on the part of the corporation.
And still stronger is the case of Pew v. Gloucester National Bank (130 Mass. 391). In that case the president of the bank was receiving a stated Salary of $400 per year. The bank under took extensive alterations to its building and to the supervision of such the president devoted substantially all of his time. This obviated the necessity for employment of a superintendent. The services thus rendered were valuable. They, were beyond the ordinary duties connected with his office. Yet, in an action brought by him upon the theory of implied promise to compensate therefor, it was held that the existence of the express contract to pay him $400 fully negatived the existence of an implied contract to pay him" a greater sum and recovery above $400 was denied.
There are a few decisions where increases in salaries have
Our attention is directed to Murray v. Smith (166 App. Div. 528) as being one of such cases. That case is clearly distinguishable in that the decision therein sustaining the increase in salaries is placed squarely upon the acquiescence of the corporation in such increase. The facts in our case do not permit the adoption of any theory of acquiescence. Such increases have been consistently and vigorously opposed.
We are further cited to MacNaughton v. Osgood (41 Hun, 109) as being antagonistic to some of the views herein expressed. That case was reversed in 114 New York, 574. Further, as is pointed out in Godley v. Crandall & Godley Co. (212 N. Y. 121), that case stands alone, among the decisions of this State, for the doctrines therein enunciated. In view of its reversal and of its lack of support in other decisions, we do not feel compelled to follow it.
This record presents no equitable reasons for modification of the strict rule of accountability existing in our law, as against directors of a corporation. Those officials stand in a fiduciary relation to both stockholders and creditors. Assets of the company coming into their possession they hold as trustees and they are to be held to the strictest rule of accountability to the beneficiaries of that trust. It is in recognition of this status of directors that our courts have uniformly held that the attempt by directors in control of a corporation to contract for such corporation with themselves individually, to their benefit, and to the detriment of the corporation, is presumptively fraudulent and in bad faith. (Billings v. Shaw, 209 N. Y. 265; Carr v. Kimball, 153 App. Div. 839; Sage v. Culver, 147 N. Y. 241; Pollitz v. Wabash R. R. Co., 207 id. 113, 124.)
And this presumption of bad faith is further accentuated by the proof in this record. These majority directors have not evidenced the slightest good faith toward the minority stockholders. Every effort by a minority director to protest against their illegal actions and unlawful withdrawal of assets from
And in further defiance of the protesting stockholders, since the commencement of the action, these defendants have voted still further and substantial increase in the salary of the defendant Burgweger. In fact these defendants have frequently taken the position that by reason of their holdings in and control of the corporation they were relieved from the obligation to account or heed the protests of the minority.
This action is for accounting by persons in a trust capacity and the plaintiff has fully met his burden of proof when he traces the assets of the concern into their hands. The clear duty is then imposed upon them of fully accounting for all such trust moneys and they can receive credit upon such accounting only for such sums as they definitely show they have expended for a lawful purpose. Upon no theory of law or equity can they be credited with any moneys for which they cannot account.
Further suggestion is made that the resolution of July, 1907, although invalid as affecting such increase in salaries, may be accorded effect as evidencing notice from the majority of directors of a termination of their former contractual status and thus the elimination of all obstacles to the application of the quantum meruit rule. Such was not the purpose or object of this resolution, and, even if it was, such could not be its effect. These men could not, by their own acts, unratified by the corporation, create between themselves and the corporation they represent any different contractual status in relation to their management of property in their hands as trustees.
The conclusions reached necessitate further accounting in this action, and such should be had before a referee appointed for that purpose. Payments of salary to these two officials
The judgment appealed from should be modified by striking therefrom all the provisions thereof except those which adjudge a recovery against the defendants Burgweger and Bartholomay of $23,884.49, and against the defendant Burgweger of $1,273.83; and further modifying such judgment by making same interlocutory only, the amounts of such recoveries to be included in the final judgment herein. Such judgment should be further modified by embodying therein provision remitting the case to Special Term for the accounting indicated in the foregoing opinion, such accounting to be had by way of reference. Conclusions of law 3, 4, 5 and 9, as found by the Special Term, should be reversed.
In view of the lack of good faith on the part of "the individual defendants, costs of this appeal and of the trial heretofore had herein should be awarded the plaintiff against the defendants Burgweger and Bartholomay.
All concurred, Kruse, P. J., in a separate memorandum, except Foote, J., who dissented in part in opinion.
Concurrence Opinion
There is a notion quite prevalent that the majority owners of a stock corporation have an absolute right to manage the business of the corporation as they see fit. That is not so. The directors of a corporation are quasi trustees for all of the stockholders and it is their duty to manage its business for the best interests of the corporation and all of its stockholders, and where they act in bad faith in managing its affairs and in the interest of a majority of the stockholders and to the detriment of the minority stockholders, such conduct should be taken into account in determining the question of their compensation for service. It frequently happens that trustees are withheld any compensation for their services where they are derelict in their
Not only have the controlling officers here voted to increase their salary over the protests of the minority, and failed to furnish an account of the moneys which they claim to have spent, but they have refused to increase the dividends, without any apparent good reason, as it seems to me, thus keeping in their control a large surplus. It seems to have been the deliberate policy of the majority directors to ignore the minority entirely, and the claim which is made that it has been their purpose to freeze out the minority is by no means without some foundation. I think if these controlling officers are allowed salaries, as stated in the prevailing opinion, they may consider themselves fortunate.
Dissenting Opinion
I agree that defendants Burgwegerand Bartholomay should be required to refund to the corporation all moneys drawn by them from its treasury for so-called entertaining and traveling expenses which they have not accounted for, except such amounts as, upon accounting, they are able to show were properly disbursed in the interest of the company’s business, and the particulars of each item so expended so far as may be necessary to enable the court to determine the items of such expenditure which were properly made. I do not think they should be allowed on such accounting for moneys which they claim to have expended in the interest of the company’s business where they are unable to show when and to whom the money was paid and for what purpose. These officers should, I think, be held in duty bound to-follow the same business method of reporting and accounting for the expenditures of the company’s money as they were in the habit of requiring from the company’s employees over whom they had supervision.
I am not able to concur, however, in the views of the majority of the court to the effect that these defendants must return to the corporation all the money drawn by them as increased salaries since July, 1907. The defendants Burgweger and
The trial court has found that the salary voted to the defendant Burgweger in 1907 and 1910 was fair and reasonable and not more than the fair value of the services he rendered to the company, but as to the salary voted to the defendant Bartholomay that it was in excess of the fair value of his services, and that such services were of the value of $8,000. These findings were made upon the testimony of apparently disinterested witnesses familiar with the value of such services, and their testimony was wholly uncontradicted, plaintiff calling no witnesses upon the subject but relying entirely upon the legal invalidity of the resolutions under which the salaries were paid.
Under these circumstances, I do not think plaintiff should be allowed in -this equity action to compel defendants to restore to the corporation all the moneys received by them as increased salaries since the resolutions of July, 1907. On that subject I agree with the views expressed in the opinion at Special Term. The case would be different if there were findings that the amounts paid as salaries were not fair and just for the services rendered or that the corporation could have procured the work to be done for less or that defendants had been guilty of some bad faith. Not only are there no such findings, but none were requested by plaintiff in the proposed findings submitted to the trial court. Plaintiff’s reliance, as shown by the findings he asked the court to make, was upon the legal invalidity of the resolutions of the board to increase the salaries. I agree that those resolutions were not of themselves sufficient to increase the salaries. They were voidable at the election of the company or any of its stockholders. If not so avoided they were binding upon defendants and estopped them from claiming any greater compensation. If avoided by the company, I do not think the effect was to limit the compensation to what defendants had been receiving the year before. That amount had -not been fixed by any resolution; in fact there was no previous resolution on the subject of salaries except the one adopted on
This case should be distinguished from Godley v. Crandall & Godley Co. (supra) and others, where directors have voted themselves salaries as mere incidents of their office.
I think the judgment should be modified as above indicated, and as modified affirmed.
Judgment modified in accordance with the opinion of Lambert, J., and as so modified affirmed, with costs to the appellant against the defendants in this court and the trial court. Findings and order to he settled before Lambert, J., on two days’ notice.