Case Title: Adams v. Smith

Citation: 153 So. 2d 221

Docket Number: 

State: alabama

Court: Alabama Supreme Court

Date: 1963-05-09T00:00:00Z

Document:
153 So. 2d 221 (1963)
M. S. ADAMS et al.
v.
Harry H. SMITH.
1 Div. 897.

Supreme Court of Alabama.
May 9, 1963.
C. B. Arendall, Jr., and W. C. Boone, Jr., Hand, Arendall, Bedsole, Greaves & Johnston, Gessner T. McCorvey, McCorvey, Turner, Johnstone, Adams & May, Mobile, for appellant corporation and directors.
T. E. Twitty, Inge, Twitty & Duffy, Mobile, for appellant widows.
Harry H. Smith and Robt. T. Cunningham, Mobile, for appellee.
COLEMAN, Justice.
This is an appeal by respondents from a decree overruling demurrers to the bill of complaint which was filed by a minority stockholder on behalf of a corporation. The appeal was taken prior to amendment of § 755, Title 7, Code 1940, by Act No. 72, 1961 Acts, page 1947.
*222 The averments of the bill are to effect that the directors have adopted resolutions to pay certain sums of the moneys of the corporation to the widow of the president and to the widow of the comptroller of the corporation; that the payments constitute unauthorized gifts of property of the corporation, made without consideration; that complainant has made demand on the directors and stockholders to take the necessary steps to restore to the corporation the funds alleged to have been thus misappropriated; but the directors and stockholders have refused to take said steps.
The complainant does not charge the directors with intentional wrongdoing or that they have received any personal benefit from the payments to the widows.
The respondents are the directors, the corporation, and the widows. The prayer is for personal judgment against the directors and the widows for the full amount of the sums paid to the widows; for injunction against further payments; and for general relief.
The averments with respect to the widow of the president are as follows:
The averments with respect to the widow of the comptroller are the same in material respects, except that the total amount voted to her is $9,750.00, of which $7,312.50 has been paid to her.
Respondents have severally assigned errors. The directors and corporation have jointly filed briefs, and the widows have jointly filed separate briefs in their own behalf.
In the briefs on behalf of directors and corporation, two propositions are argued: first, that the allegation, that the payments to the widows are "ultra vires the powers of the corporation," is a mere conclusion of the pleader.
Complainant's right to relief is founded on the proposition that the payment of the corporation's money to the widows, without consideration, is illegal and not within the power of a mere majority of the stockholders over the objection of a single stockholder. As we hereinafter undertake to *223 show, we are of opinion that complainant's contention is correct, unless there is in the charter of the corporation a provision which confers on the majority the power to give away the corporation's money without consideration.
So far as we are advised, a provision in the charter of a business corporation permitting a majority to give away corporate property, without consideration, would be unusual if not unique. In the logic of the strict rule construing a pleading against the pleader on demurrer, however, it appears to us that it must be admitted that a corporation's charter could contain a provision permitting such a gift.
Complainant undertakes to aver that the alleged payment is illegal because it is not authorized by the charter. For the complainant to aver merely that such provision is not in the charter, or that such a payment by the majority is ultra vires, is to aver a conclusion merely. This court has said:
The instant bill does not contain a copy of the certificate of incorporation nor are the charter powers otherwise stated in the bill. It follows, therefore, that the averment that the alleged payments are ultra vires is not a proper pleading of facts and the grounds of demurrer taking that point were due to be sustained. For that error, the decree must be reversed.
The second proposition argued by the directors is that the bill is without equity.
If, in fact, there is no provision in the charter which authorizes the majority stockholders to pay out corporate funds without consideration, then we are of opinion that the bill does have equity. Appellants have devoted many pages of brief and citation of more than fifty cases to establish the propositions that the alleged payments to the widows are authorized under the so-called "Business Judgment Rule," and that the alleged payments may be made lawfully by the directors under their power to manage the internal affairs of the corporation without interference by the courts, or, that if the directors could not do so, then the majority of the stockholders could ratify the alleged acts of the directors, who would not be liable after such ratification. We will respond to these contentions.
The directors say in brief that they "do not question the existence or validity of this rule" that "neither the Board of Directors nor the majority stockholders can give away corporate property," and that the rule "is and must be the law of the land."
The appellants argue, however, that directors or majority stockholders have power to make bonus or retirement payments to officers and employees of the corporation, and their widows or dependents, because such payments can be and are for the benefit and furtherance of the business of the corporation. We are not disposed to contest the proposition that, in a proper case and *224 under proper procedure, corporations can make bonus and pension payments. That, however, is not the case averred in the bill. The averment is that the payment to the widow was without valid consideration and that the corporation had no contract for the payment of the alleged sums.
Of the cases cited by appellants, the only ones bearing on payments to widows appear to be cases affecting tax liability for payments to widows of corporate officers. Among these are Simpson v. United States, 7 Cir., 261 F.2d 497, and Fifth Avenue Coach Lines, Inc. v. Commissioner, 21 T.C. 1080.
In Simpson, the court held that payment to widow by corporation was not a gift but was taxable income to the widow. In Fifth Avenue, the tax court held that payments to the widow were deductible by the corporation as business expense.
In Simpson, for aught that appears, the stockholders unanimously approved, and in Fifth Avenue, "a great majority" (31 T.C. 1084) of the stockholders approved. It does not appear in either case that a minority was contesting the power of the majority to make the payment to the widow. The issue in those cases was not the issue in the instant case and they are not persuasive here.
On the other hand, in Moore v. Keystone Macaroni Mfg. Co., 370 Pa. 172, 87 A.2d 295, 29 A.L.R.2d 1256, a minority stockholder sought to enjoin payments by corporation to the widow of a former officer of the corporation and for restitution of payments theretofore made. The trial court,
The Supreme Court of Pennsylvania, in affirming the decree appealed from, said:
We do not agree with appellant that Chambers v. Beaver-Advance Corporation, 392 Pa. 481, 140 A.2d 808, modified or overruled Moore. In Chambers, the court approved the payment of fair and reasonable bonuses for the current or prior calendar or fiscal year if such bonuses were approved by the majority stockholders. That was not the Moore case and is not the instant case.
In the case at bar, we hold that the bill has equity, and that the court did not err in overruling the grounds of demurrer which challenge the equity of the bill.
The widows, in their briefs, contend further that, even if the payments to them be ultra vires the corporation and illegal, nevertheless, the corporation cannot recover from the widows, and judgment cannot be rendered against them, because the payments to the widows were made under mistake of law; and the rule is that money voluntarily paid with knowledge of all the facts and by reason of a mistake of law cannot be recovered; citing Rice v. Tuscaloosa County, 240 Ala. 4, 198 So. 245; Rice v. Tuscaloosa County, 242 Ala. 62, 4 So. 2d 497; and Clifton v. Curry, 30 Ala. App. 584, 10 So. 2d 51.
In the three cases last cited, the payment had been made by the payor himself and not by his agent. In the case at bar, payment was made by the directors who were agents or trustees of the corporation. The rule applicable here, it seems to us, is as follows:
The principal or cestui que trust may not, so it seems follow the trust funds and recover them from a bona fide purchaser for value without notice, Preston & Stetson v. McMillan, supra, but the widows, in the case at bar, had notice that the money paid to them was the money of the corporation, and the widows have not parted with value.
In Hooper v. Merchants' Bank & Trust Co., 190 N.C. 423, 130 S.E. 49, the court affirmed a judgment whereby a principal was allowed to recover from the payee a certain sum paid to the payee by the principal's agent who had acted without authority. The payee contended there, as the widows do here, that it was a voluntary payment with full knowledge of the facts and that the principal could not recover. The court said:
We hold that the principle of voluntary payments under mistake of law does not apply to the payments to the widows. Recovery against the widow was allowed in Moore v. Keystone, etc., supra. See also: Bronaugh v. Evans, 204 Ala. 153, 85 So. 556; Wood v. Hendon, 16 Ala.App. 327, 77 So. 921.
Appellee argues in brief that the attorney who is representing the directors cannot represent also the respondent corporation and says that his appearance for the corporation should be stricken. That issue was not raised in the trial court and is not before us.
For the error pointed out, the decree is reversed and one is here rendered sustaining the demurrer. The cause is remanded with leave to appellee to amend within thirty days from the date on which the decree of this court is received by the Register of the Circuit Court of Mobile County, In Equity.
Reversed, rendered, and remanded.
LIVINGSTON, C. J., and LAWSON and GOODWYN, JJ, concur.