Case ID: ky_147/html/0242-01.html
Source: Caselaw Access Project
Author: {"author": "Chief Justice Hobson—", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

Poutch, et al. v. National Foundry and Machine Company, et al.
    (Decided February 29, 1912.)
    Appeal from Jefferson Circuit Court (Chancery Branch, First Division).
    
      Corporation Stock. Owners — Increase of Salaries — Legality.—Three persons who owned a majority of the stock of a corporation, were also its directors, and respectively its president, vice president and secretary. As directors they increased their salaries as president, vice president and secretary. A minority stockholder complained. Held, that as the proof showed that the salaries paid were reasonable for the services rendered, .the action of the directors was not fraudulent; and that no recovery could he had.
    HELM & HELM and P. H. SAVAGE for appellant.
    PUNES & NORMAN for appellee, National Foundry & Machine Company.
    J. C. DODD for appellee, Doerhofer.
   Opinion of the Court by

Chief Justice Hobson—

Affirming.

Frank L. Reeder, Albert B. Freeville and Basil Doerhofer own 282 shares of stock in the National Foundry and Machine Company out of a total issue of 500 shares. H. H. Poutch and wife, who are among the minority stockholders, brought this suit for themselves and the other stockholders against the three persons named and the company, complaining that they had paid themselves out of the money of the company, sums to which they were not entitled, they being the directors of the company and also its president, secretary and treasurer and vice president. By resolution of the Board of Directors on January 11,1899, the president and manager’s salaries were fixed at $2,000 per annum, the vice president and-superintendent’s salaries at $1,500 per annum; and the secretary and treasurer’s salary at $1,300 per annum. By a resolution adopted on February 5, 1901, it was provided that the salaries of the officers for the ensuing year should remain the same as for .the last year. But no resolution appears on the books fixing the salaries for the year 1900. Reeder was president and also treasurer; Freeville was secretary and assistant treasurer, also superintendent or general manager. The company ran a foundry. Freeville stayed in the office and ran the office end of the business. Reeder was a practical mechanic and ran the foundry. Doerhofer was connected with several moneyed institutions and ran the financial part of the business, exercising a gehéral oversight over it all. While they were the directors of the company their salaries were paid as follows:

F. L. Eeeder A. B. Freeville Basil Doerhofer

1900-3 ......$3,000.00 $2,000.00 ........

1904-5 ...... 3,300.00 .2,300.00 ........

1906-7 ...... 4,500.00 3,500.00 $1,000.00

1908 5,750.00 4,740.00 1,500.00

1909 6,500.00 5,500.00 2,000.00

The complaint of Pontch is that the increase of their salaries was not justified by the business or anything in the ■ condition of the company and was simply a division of the profits of the company between themselves in fraud of the rights of the other stockholders. The circuit court on the evidence dismissed the petition, and Poutch appeals.

There is no complaint as to the management of the' company’s business. The company began business in the year 1892 with a capital of $15,000.00. This was afterwards increased to $50,000.00, but only $30,000.00 was actually paid in. During its existence the company has paid out of its profits in stock or cash to the stockholders $87,797.59. On December 31, 1909, it had assets as follows: Eeal estate, $33,640; buildings, $22,114.07; machinery, $28,940.88; accounts due it about $30,000.00; cash on hand about $3,000; other assets $5,000 or $6,000. It owed about $20,000. - The proof also shows that Eeeder, Freeville and Doerhofer have given their personal attention to the business of the company and that its success has been due largely to their efforts. They are all good business men, and skilled in their respective lines. The gross sales of the company for the years named are as follows: 1900, $168,000.00; 1901, $113,-000.00; 1902, $139,000.00; 1903, $140,000.00; .1904, $113,-000.00; 1905, $115,000.00; 1906, $140,000.00; 1907, $141,-000.00; 1908, $136,000.00; 1909, $103,000.00.

The directors entered on their books no resolution changing the salaries or declaring dividends from 1900 to 1909, but the proof is undisputed that the directors in fact met, declared the dividends and fixed the salaries as indicated above. The minutes not having been entered on the books when they should have been, may be considered when entered later. Parol proof may be received to show what was in fact done by the directors. There was a quorum of the Board without either of appellees voting on his own increase of salary and none of them did vote in his own case. It is also insisted that during this time, statements which had been hitherto mailed, to the stockholders were not mailed out to them showing-the condition of the company; but this is also explained and seems to have been acquiesced in by the stockholders. No stockholder now but Poutch complains, and we think it evident from the record that many of them at least knew how things were going at the time these transactions were had or soon thereafter. Poutch did not complain until he fell out with the directors because they did not give him the insurance of the company.

It is insisted that since 1900 the business of the company has not been as large as it was before'; that notwithstanding this the salaries of the officers have' been increased and that the figures show on their face that these increases were made at about the same rate to' each of them, that is, they show that the three of them wure dividing the money between them. There is some force in this. On the other hand, a manufacturing business such as this company was doing must be skillfully managed. If it is not managed by men of skill, the corporation may soon become bankrupt. Men who have the skill and ability to manage successfully such a business can command good salaries. The undisputed evidence in the record is that the salaries paid are not more than the services are worth.

. It is true directors hold a position of trust. It is their duty to manage the business of the corporation honestly and with fidelity. As they occupy a position of trust when they vote a salary to one another, they can not keep the money if they acted to the prejudice of the corporation. It has been held that the presumption is that directors act in their own interest under such circumstances as we have here, and that the burden of proof is on them to show the fairness of the transaction. But whatever maybe held as to the burden of proof, the general rule is that the action of the directors must be a fraud on the corporation, actually or constructively, before the directors can be held liable. (Fillebrown v. Hayward, 190 Mass., 472; Davis v. Memphis City Railway, 22 Fed. 883; Manufacturer’s Land Co. v. Cleary, 121 Ky., 403; Pittsburg, etc., R. R. Co. v. Dodd, 115 Ky., 176; Eaton v. Robinson, 19 R. I., 146.)

The proof here shows that the corporators agreed among themselves that the salaries should be kept low until the company got on its feet; and that the increase of salaries which is complained of was not improper or excessive. There has been a great increase in the cost of living in the last six years. The purchasing power of money is not near so large as it was then, wages generally have increased, and it is manifest that some increase in these salaries might properly have been made. We give considerable weight to the finding of the chancellor on questions of fact and we cannot undertake to say how much increase in these salaries would be reasonable, upon our own experience, or without any proof to guide us. We do not decide that the salaries at this rate may continue to be paid in the futuré. We only decline to disturb the finding of the chancellor on the record as here presented.

Judgment affirmed.