Case ID: ad_135/html/0206-01.html
Source: Caselaw Access Project
Author: {"author": "McLaughlin, J. :", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

Ella M. Davids, Suing on Behalf of Herself and All Other Stockholders Similarly Situated Who May Desire to Come in, Respondent, v. Louisa A. Davids and Others, Appellants.
    First Department,
    December 30, 1909.
    Corporations — directors — expenditure of profits in payment- of salaries — rights of minority stockholder.
    Where the directors of a corporation having a capital of §30,000, by resolution increase the collective salaries paid to officers from'$6,750 to §24,000, so as to practically usé up the entire earnings of the corporation, the court,.at the suit Of a minority stockholder, will compel the directors to make restitution. Directors of a corporation are trustees, and must manage its affairs with honesty ■ and fidelity in the interest of stockholders.
    Under the circumstances aforesaid, restitution will be decreed, although each-salary was voted upon separately and no director personally voted on the. resolution to increase his own salary as officer.
    As directors of a corporation who vote themselves salaries are in the position of trustees dealing with themselves to their own advantage, it is presumed that they acted'in their own interest to the prejudice of the corporation, and the i burden is upon them to overcome the presumption.
    Although a minority stockholder has no part in. the management of his corporation, he has a right to prevent -the directors from misappropriating the corporate funds under the guise of voting salaries.
    
      It seems, that the court, in decreeing restitution under the circumstances afore said, should not have permitted the directors to retain an amount equivalent to the salaries received by officers before the increase.
    ' Appeal by the defendants, Louisa A. Davids and others, from a judgment of the Supreme Court in favor of the plaintiff, entered in the office of the clerk of the county of Hew York on-the ,3d day of July, 1909, upon the decision of the court rendered after a trial at the Hew York Special Term. ' . •
    
      Albert Ritchie, for the appellants.
    
      Charles Adkins Baker, for the respondent.
   McLaughlin, J. :

The plaintiff, since 1901, has been the owner of 50 shares of the capital stock of the defendant Thaddeus Davids Company, a domestic corporation with a capital of $30,000 divided into 300 shares of the par value of $100 each. For some years prior to his death, which occurred in August, 1905, David F. Davids, plaintiff’s father-in-law,- had been the president and treasurer of the company and practically controlled the management of its affairs. BLe. was, in form, paid a salary of $20,000 a year, but of this amount actually retained as salary only $2,500 and the balance he distributed among ' the stockholders of the company in proportion to their respective holdings. After his death the defendant Louisa A- Davids, his widow, succeeded him as president and treasurer and distributed the salary received by her for the balance of the year 1905 in the same way that he had done. On the 8th of January, 1906, the directors of the company met and passed the following resolution : “ On motion the services of the officers were readjusted on basis of official labor; that of the president and treasurer to be $8,000, and that of assistant treasurer to be $8,000, and that of the secretary $8,000. L. A.. Davids, president .and treasurer, $8,000 per annum; J. W. R. Merckle, assistant treasurer, $8,000 per annum; Edwin W. Davids, secretary, $8,000 per annum.” The three persons named in and' who passed the resolution constituted all of the directors of the corporation and they owned all of its stock except the shares owned by the plaintiff. For some years prior to the passage of the resolution, Edwin W. Davids’ salary as secretary had been $2,250 a year, and Merckle’s salary $2,000. After paying . the salaries specified in the resolution, the net earnings of the company for. the year 1906 were some $6,000, and for the year 1907 there was an actual loss of something like $1,000.

The plaintiff, in October, 1907, brought this action to compel the directors to return to the corporation the salaries paid in pursuance of the resolution, the complaint alleging that the directors had voted these salaries fraudulently for the purpose of depriving her of her just share in the profits of the corporation. Shortly after the commencement of the action Edwin "W". Davids died and his executor was duly substituted as. a party in his place. The answer of the defendants put in issue the material allegations of the complaint. At the conclusion of the trial the court found in favor of the plaintiff ; that the services rendered by Louisa A. Davids, as president and treasurer, from January 1, 1906, were purely nominal; that the services rendered by Edwin W. Davids Were reasonably- worth $2,250 a year, his former salary; that those rendered by Mercklewere worth $2,000 a year, his former salary; and that all sums received by the defendants over and above such amounts had been wrongfully and unlawfully taken from and should be returned to the corporation. Judgment was entered to this effect, from which the defendants appeal.

Before the passage of the resolution referred to, the aggregate annual salaries paid to these three officers were $6,750. ' While the president had nominally received a salary of $20,000, it is perfectly obvious that his real salary had been $2,500, and the fact is not disputed that the balance of $17,500 was distributed each year among the stockholders according to their respective holdings. This-method of distributing profits in the guise of salary, is not. unknown and, no matter what the purpose was in the present case, it was a distribution of profits among those legally entitled thereto, and nothing else. By the resolution, therefore, the directors increased their collective salaries from $6,750 to $24,000, which practically used Up the entire earnings of the corporation.

It is difficult to see how the plaintiff could have made out a stronger case of fraud. The capital of the company was, as already stated, only $30,000, and the three directors were the only stock holders, 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 ho right to vote themselves salaries. ' In doing so they were not occupying that impartial position which the law requires; in other words, self-interest might induce them to act to the prejudice of the other stockholder. 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. (Jacobson v. Brooklyn Lumber Co., 184 N. Y. 152; Miller v. Crown Perfumery Co., 125 App. Div. 881; Fitchett v. Murphy, 46 id. 181; Snow v. Church, 13 id. 108; Ziegler v. Hoagland, 52 Hun, 385.)

As was said in Fitchett v. Murphy (supra), quoting from the opinion of the court below (26 Misc. Rep. 644): “ Directors of a corporation have no right to vote salaries to themselves as mere incidents to their offices, as was done here. * * * As in fixing their compensation they are in the position of trustees dealing with themselves in respect of their trust, their action is subject to question by the stockholders and to review by a court of equity at the suit of a stockholder.”

It is suggested that the resolution referred to was voted on in parts and that no director voted on the proposition to increase his own salary, and there is some testimony in the record to this effect. But assuming that such testimony is true, and that the court would have been justified in making a finding to that effect, it would have ' been no justification for the increase. All that would have amounted to would have been to give the semblance of legality to a wrongful act, which would not prevent a court of equity from exercising its powers to compel a restitution.

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 position of trustees dealing with themselves, to their own advantage, with respect to their trust. In such case the presumption is that they acted in their own interest, to the prejudice of the corporation, and the burden was upon them to overcome such presumption. (Sage v. Culver, 147 N. Y. 241.) This they entirely failed to do. A minority stockholder in a corporation has nothing to say about the management of its business and affairs, because the directors are elected by the majority. Hot withstanding this fact a minority stockholder has some rights, which the directors are bound to respect, viz., that the property of the corporation shall not be . stolen or misappropriated under the guise and pretense of salaries of officers, and whenever such attempt is made and the a.ct by which it is attempted to accomplish that result is reviewed by a court of equity, it will not hesitate, to compel the directors to do what they ought to have done by way of restitution.

The trial court here should have directed the return of all moneys withdrawn. It ought not to have permitted any of the defendants to retain an amount equivalent to the amount of salaries received before the passage of the resolution, because they had no legal right to such sums. The plaintiff, however, did not appeal. She does not complain of this allowance.

If the foregoing views he correct, then it follows the judgment appealed from should be affirmed, with costs.

Ingraham, Laughlin, Houghton and Scott, JJ., concurred.

Judgment affirmed, with costs.