Singer v. Salt Lake Copper Mn'f'g Co.

17 Utah 143 | Utah | 1898

Babtch, J.

(after stating the facts):

The first assignment of error which we will consider is the one respecting the holding of the court, that the first trust deed, or that executed June 1, 1894, is valid. The appellants insist that it is void, and appear to-base their contention upon the grounds that the meetings of the board at which it was authorized and executed were not legally called, that the deed was not signed by the president and secretary, and that one of the beneficiaries was a director of the corporation, and participated in the meeting at Denver when the trust deed was executed. Under section 493, 1 Mills’ Ann. St. Colo., by virtue of which the Salt Lake City Copper Manufacturing Company was incorporated, and under the articles of incorporation and by-laws, there is no doubt that the board of directors had the right to hold meetings beyond the limits of the state of Colorado; and the question, therefore, as to the first point of contention, is whether the meetings at New York and Denver were lawfully convened. A careful examination of the record reveals nothing to show that either one of these meetings was convened without notice to all the directors. On the contrary, from the minutes of the New York meeting it is clear that the board met on call of the president at New York on May 23, 1894. Whether this call was made by previous order of the board, as provided in the articles of incorporation, or whether all the members were actually notified of the meeting, does not appear from the minutes. Nor is there any extrinsic evidence to show that the directors were not properly notified. It does appear that four of the five members of the board were present, and participated in the meeting. So, of the Denver meeting, there is nothing to indicate that it was not a legally called meeting, of which all the directors had due and legal notice. The minutes of both meetings show the business which was transacted, and that a quorum was present. Under such circumstances, and in the absence of any evidence to show that the meetings were not lawfully convened, the court would not be justified in holding that these meetings were unlawful. Where meetings of a legally constituted board of directors have been held, and business within the scope of and pursuant to the purposes for which the corporation was organized was transacted, the presumption is that such meetings were regularly called and held for the transaction of such business, and the onus probandi is upon him who maintains the contrary to allege and prove that they were not so called and held. “This presumption includes the presumption that the meeting of a board of directors at which a given resolution was passed was regularly convened. Thus, where the validity of an act done at a special meeting of the board of directors of a corporation is drawn in question on the-ground that some of the directors were not notified to attend the meeting, the burden is on the party attacking’ the regularity of the proceedings to show that the directors in question were not in fact notified. If it appear-that a meeting was held, and that a quorum was present,, it will be presumed, in the absence of evidence to the contrary, that due notice was given, and that all steps necessary to constitute it a regular and valid meeting were taken.” 3 Thomp. Corp. § 3297. See, also, Id. § 3926; 1 Cook, Stock, Stockh. & Corp. Law § 600; 1 Mor. Priv. Corp. § 532; Wells v. Rodgers, 60 Mich. 526; Leavitt v. Mining Co., 3 Utah 265; Insurance Co. v. Holmes, 68 Mo. 601; Hardin v. Construction Co. (Iowa), 43 N. W. 543. And notice need not be affirmatively shown by the record. 3 Thomp. Corp. § 3934; Sargent v. Webster, 13 Metc. (Mass.) 497; Wells v. Rodgers, supra.

If, therefore, the appellants wished to attack the validity of either or both of the meetings in question, it was incumbent upon them, by proper averment in their answer, to raise tjie issue that the meeting or meetings were irregularly and illegally convened, because of want of notice or otherwise, and then to establish the fact by proof at the trial. The question of the legality of those meetings was one of grave importance to the plaintiff, because upon it depended the validity of the first trust deed, through which he and others claimed priority of payment over the appellants. This is especially so, ow: ing to the insolvency of the common, debtor. The plaintiff was entitled to be informed by their answer as to the true nature of the defense which his adversaries intended to make, so that he could prepare to meet it. “The very' object and design of all pleading by the plaintiff, and of all pleading of new matter by the defendant, is that the adverse party may be informed of the real cause of action or defense relied upon by the pleader, and may thus have an opportunity of meeting and defeating it, if possible, at the trial. Unless the petition or complaint, on the one hand, and the answer, on the other, fully and fairly •accomplishes this purpose, the pleading would be a useless ceremony, productive only of delay, and the parties might better be permitted to state their demands orally, before the court at the time of the trial. The requirement, therefore, that the cause of action or the affirmative defense must be stated as it actually is, and that the. proofs must establish it as stated, is involved in the very theory of pleading.” Pom. Rem. & Rem. Rights § 554; Walton v. Minturn, 1 Cal. 362; Green v. Palmer, 15 Cal. 412; Campbell v. Jones, 38 Cal. 507. There appear to be no allegations in the answers of the appellants that no notice of those meetings was given to the directors, nor that they were otherwise unlawfully held. They having failed to raise such an issue by the pleadings, and to establish the same by competent evidence, the presumption, “Omnia rite acta,” must be held to apply, and the meetings be regarded as in all respects regular and valid.

There is no foundation for the contention that the first trust deed was not properly executed. A committee was authorized to procure the loan, and the officers who executed the trust deed were expressly authorized by the board, and by virtue of the by-laws were proper officers, to execute the deed. Nor can the fact that che plaintiff, who was a director and interested in the loan, participated in the meeting at Denver when the trust deed was executed and delivered, avail the appellants, under the facts and circumstances disclosed. The board of directors of the corporation consisted of five members, three of whom constituted a quorum, and at the meeting held in New York there were present four directors, and it is true that plaintiff was one of them, but there was a quorum present without him. At that meeting, by unanimous action, the board authorized a committee to negotiate a loan of $100,000, and empowered the proper officers to execute the necessary papers therefor, including a trust deed, on the property of the company. At that time the corporation was solvent — a going concern — and pursuing the objects of its creation. The loan was ordered to be negotiated for the purpose of paying its bills and overdrafts at a bank, and to complete and put into operation its electrolytical plant and copper refinery. The committee, it appears, found it difficult to procure the entire sum from disinterested parties, and hence negotiated with the plaintiff and three others, who furnished the money; and at the meeting held in Denver the loan which had thus been previously authorized was perfected, by the proper officers executing and delivering the notes and trust deed. There seems to be nothing in the transaction which is tainted with fraud or collusion. It has. the appearance of a fair business dealing, made, not for the purpose of hindering or delaying creditors in the collection of their claims, or securing an advantage over -creditors, or defrauding them, but for the purpose of discharging honest obligations, and continuing the business of the corporation. Under these circumstances, the mere fáct that a director furnished a portion of the money borrowed does not have the effect of vitiating the trust deed given to secure the loan. Nor would this trust deed be void, under the circumstances surrounding its execution, even if it were conceded that the plaintiff, being the director who furnished a portion of the money, improperly voted, as one of the quorum, at the Denver meeting where the same loan was again authorized, because an examination of the minutes of the New York meeting shows that the power then and there conferred upon the committee to negotiate the loan was full and complete, and hence there was no necessity for any further authorization at the subsequent meeting. The mere doing of an unnecessary thing, at the Denver meeting, cannot have the effect of rendering void what was lawfully done at the New York meeting. At the time of the transaction neither the good faith bf the plaintiff nor of the other beneficiaries was questioned by the company or any stockholder or creditors, and months thereafter the claims of these beneficiaries, including that of the plaintiff, were recognized in the very trust deed under which the appellants claim; and this with the knowledge of the appellants. Where, as in the execution of the trust deed here under consideration, there is an entire absence of a want of good faith, fraud and collusion, and the corporation is yet a-going concern, no sound principle of law prohibits a stockholder or director from dealing with the corporation. A corporation is an artificial entity, and one of the principal objects of its creation is to contract with individuals in due course of business. This it may do with its directors and stockholders as well as with others; and under the weight of American authority, at least, contracts made by the corporation with its officers are not void per se, but at most voidable merely, at the election-of the corporation or its representatives, within a reasonable time. Neither the corporation nor a stockholder is complaining here. It is quite true that since the will of such an officer goes to make up or forms a part of the will of the legal entity, and the officer is therefore, in some sense, on both sides-of the contract, — is dealing with a creature of which he forms a part, — his contract with the corporation will be very carefully and closely scrutinized in equity, and will be set aside if not made in the utmost good faith. This doctrine was recognized by this court in Mercantile Co. v. Mt. Pleasant Equitable Co-operative Inst., 12 Utah, 213, where it was said: “So, in the absence of contrary legislation, a mortgage executed by a corporation under embarrassed circumstances, to enable it to continue its business, will be sustained if the whole transaction be in good faith; and a corporation may also, in like manner, obligate itself to a stockholder or director. But in such last cases a court of equity will very closely scrutinize the transactions, and, in case of a contest between a general creditor and a director or other managing officer, will require of the latter very strict proof of good faith, and that the mortgage or other incumbrance was not executed in expectancy of insolvency, for the purpose of securing an advantage over other creditors; and such transactions may be set aside on slight grounds.”

In Oil Co. v. Marbury, 91 U. S. 587, Mr. Justice Miller, delivering the opinion of the court, said: “While it is true that the defendant, as a director of the corporation, was bound by all those rules of conscientious fairness which courts of equity have imposed as the guides for dealing, in such cases, it cannot be maintained that any rule forbids one director among several from loaning money to the corporation, when the money is needed, and the transaction is open and otherwise free from blame. No adjudged case has gone so far as this. Such a doctrine, while it would afford little protection to the corporation against actual fraud or oppression, would deprive it of the aid of those most interested in giving aid júdiciously, and best qualified to judge of the necessity of that aid, and of the extent to which it may safely be given.” 3 Thomp. Corp. §§ 4059, 4061; Harts v. Brown, 11 Ill. 226; Saltmarsh v. Spaulding, 147 Mass. 224; Smith v. Skeary, 47 Conn. 47; Gas Co. v. Berry, 113 U. S. 322; Beach v. Miller, 17 Am. St. R. 291; Leavenworth Co. Com’rs v. Chicago I. & P. R. Co., 134 U. S. 688. Upon the foregoing considerations, we are of the opinion that the trust deed executed June 1, 1894, is valid.

This brings us to the question of the validity of the trust deed executed to A. Hanauer, trustee, on September 24, 1894. The appellants maintain that this trust deed is valid, while the respondents insist that it is void, because —First, no notice to directors was given of the meeting at which it was authorized; second, the company at the time of its authorization and execution was insolvent; and, third, for actual fraud. The main controversy on this branch of the case is respecting the legality of the meeting held on September 24, 1894, and the motives which prompted the execution of the trust deed of that date. On the question of notice to directors of the meetings of the board, article 2 of the by-laws of the corporation, in conformity with section 493, 1 Mills’ Ann St. Colo., provides: “The board of directors shall hold meetings, when called by the secretary, upon request of the president or any three directors, upon timely notice thereof.” Under this provision of this by-law the directors were required to hold meetings, and were to have timely notice; that is, every director was entitled to have notice in some way of each and every meeting of the board. In general, the directors had no authority to act, except when lawfully convened upon notice to all of them. This is a. rule common to all corporations, and prescribes the mode for convening the agents to transact corporate business. A corporation being but an artificial entity, has but one will, and this will is collected by the sense of a majority of the directors. Its will so collected, directs and controls the corporate acts. It is therefore important that every director should have an opportunity to be heard on all matters affecting the corporation, so that, through the sense of all, its best interests may be sub-served. Every director is entitled to the reasoning, judgment, and advice of every other director, and cannot be deprived therefrom through failure to give notice. So the stockholders are entitled to have the corporate business conducted in view of the experience and wisdom of all the directors, and of this right they cannot be deprived by the arbitrary will of a quorum. It is true, it is not imperative for every director to be present' at every meeting, but he should if possible, have notice, and an opportunity to be present; for where matters to be acted upon call for deliberation and judgment, all interests and parties to be affected should have the benefit of the wisdom and counsel of all those intrusted with the decision. Although all may not concur, still the arguments and information of each may modify and affect the conclusion which otherwise might be reached. If notice were not required, it would doubtless frequently happen that the director, whose judgment because of his superior knowledge, power of perception, and experience in the corporate affairs, would carry the greatest weight in the deliberations, would, through lack of notice, be absent, and the other directors deprived of the benefit of his arguments. There are other reasons why personal notice must be given to the directors of all meetings of the board, for which the time and place of holding the same are not 'stated in the by-laws or rules of the corporation. If the law were otherwise, the interests and rights of the minority would be subject to great abuse, and even those of the majority would not be safe; for, where the minority would constitute a majority of a quorum, they might give notice to a bare quorum, and at a meeting so called change the entire policy of the majority, and transact business which would destroy the best interests of the corporation. This sequence was clearly stated by Mr. Justice Brewer in Paola & F. R. Ry. Co. v. Anderson Co. Com'rs, 16 Kan. 309, where he says that, if the rule as to notice were otherwise, then, in a “body composed of twelve members, a quorum of seven could act, and a majority of that quorum — four—could bind the body. An unscrupulous minority of four, by withholding notice to five, might thus bind both the body and the corporation.” While, however, the general rule is that every director, under such by-laws as the one in question herein, must have notice of the time and place of every meeting df the board, still there may be exceptions, as where such án emergency exists as justifies immediate action on the part of the board, and the giving of notice to all the members is not practicable, or where a director should secrete himself in order to prevent a meeting, or is beyond the reach of notice; and there may be other instances where the giving of notice to every director would not be practicable, and a lack of notice would be excusable. In such cases the rule cannot be permitted to be used as a weapon to prevent the transaction of corporate business, and thereby defeat the end and object for which the corporation was created. The general rule that notice must be given in some way to all directors of meetings of the board, where the by-laws and rules of the corporation do not provide the time and place of meeting, in order to tender them valid, is well settled. In Simon v. Sevier Ass’n, 54 Ark. 58, it was said: “No director is required to attend a meeting of directors held without authority. Every one of them is entitled to vote and be heard in all the proceedings of the board. The shareholders in the corporation are entitled to the influence and advice of every director in the inanagment of their affairs. Hence, in order to accomplish the object for which each director was elected, a mere majority of the directors cannot constitute a majority of the board for the transaction of business unless they meet according to, and by authority of, the by-laws or rules of the corporation, or are called together upon due and legal notice given to all of them. Assembled in any other manner, they cannot act as a board, but as individuáis, and such acts are not the acts of the corporation.” 5 Thomp. Corp. § 6176; 1 Mor. Priv. Corp. § 532; 1 Beach, Priv. Corp. § 279; Bank v. McCarthy, 55 Ark. 473; Stow v. Wyse, 7 Conn. 214; Farwell v, Copper Works, 8 Fed. 66; Doernbecher v. Lumber Co. (Or.), 28 Pac. 899; Wiggin v. First Baptist Church, 8 Metc. (Mass ) 301; Harding v. Vandewater, 40 Cal. 77; Boyle v. Mizner, 42 Mich. 332.

Appellants cited the cases of Edgerly v. Emerson, 23 N. H. 555, and Bank v. Flour Co., 41 Ohio St. 552, which hold that, if a quorum of directors meet and unite in any determination, the company is bound thereby, though the absent creditors had no notice; but these cases are evidently opposed to the great weight of authority, and we therefore decline to follow them. In the case at bar it is shown that all the directors of the corporation were summoned to Salt Lake City to attend a meeting to be held on September 20, 1894, for the purpose of transacting the business and straightening up the affairs of the corporation. It was found that the $100,000 borrowed previously, on June 1st, had been expended, but the company’s plant had not been completed as had been anticipated. The corporation was $50,000 in debt, and money was needed to pay for labor, machinery, etc.; and, it would seem, certain persons were to advance the money. On September 20th, pursuant to call, the directors held a meeting, all being present, and, upon transacting the corporate business, adjourned. At that meeting Saks was authorized to borrow $10,000 for the use of the corporation, of which, it appears, the plaintiff paid $2,500, and, after guarantying, with two others, the payment of the $50,-000 debt, on September 21, 1894, started for Chicago, and afterwards went to New York city. Directors Green and Mears resigned, and their places were filled by others. On September 24, 1894, David May, Andrew Saks, and J. E. Shoenberg, being a quorum of the directors, held a special meeting, as shown by the evidence, without any notice whatever to tbe absent members, or the existence of such an emergency as would excuse notice, and at such meeting the trust deed here under consideration was authorized, and then executed. The directors holding this meeting knew where the plaintiff was going, but nevertheless failed to notify him of the meeting, which was held but three days after his departure, and but four days after the regularly convened meeting. In the trust deed, Saks and May preferred themselves, for the sum of $50,-000, over the creditors secured by the trust deed of June 1, 1894, which was unrecorded; and yet there appears to be nothing to show that the corporation owed them anything. At the same meeting these directors also transferred to the trustee in the trust deed 99,997 shares of the capital stock of the Utah Mining Company, as further security. All the parties to the trust deed of September 24, 1894, and the directors who authorized its execution, knew at that time of the unrecorded trust deed, and were aware of its terms and conditions. Further record reference respecting the meeting and trust deed here under consideration would seem useless and unimportant, because the inevitable conclusion to which reflection upon the facts and circumstances shown by th‘e record leads is that the meeting of September 24, 1894, falls within the rule above considered, and therefore, for lack of notice to the absent directors, was unlawfully convened; that all the acts done by the directors at that meeting were without force or effect; that the trust deed and transfer of the mining stock of that date are, ab initio, null and void.

As to the second proposition of respondents, the fact that the corporation was insolvent when the trust deed was authorized and executed, alone, would not per se render that instrument void.

Having reached the conclusion stated above, it becomes unnecessary to discuss the question of fraud. It suffices to say in relation thereto that the transaction-which culminated in the execution of the second trust deed and transfer of the stock was, under the doctrine of Mercantile Co. v. Mt. Pleasant Equitable Co-operative Inst., 12 Utah, 213, also fraudulent. Nor is it necessary to discuss any of the other questions presented in the record. The decree entered by the learned court appears to dispose of the various claims against the corporation in a lawful manner, and upon careful consideration we are not inclined to disturb that decree. The judgment is affirmed.

ZANE, C. J., and MINER, J., concur.