Case Name: A. C. BASSETT and CONSOLIDATED BITUMINOUS ROCK COMPANY, Respondents, v. J. A. FAIRCHILD et al., Appellants
Court: Supreme Court of California
Jurisdiction: California
Decision Date: 1901-05-09
Citations: 132 Cal. 637
Docket Number: S. F. No. 1366
Parties: A. C. BASSETT and CONSOLIDATED BITUMINOUS ROCK COMPANY, Respondents, v. J. A. FAIRCHILD et al., Appellants.
Judges: 
Reporter: California Reports
Volume: 132
Pages: 637–656

Head Matter:
[S. F. No. 1366.
In Bank.
May 9, 1901.]
A. C. BASSETT and CONSOLIDATED BITUMINOUS ROCK COMPANY, Respondents, v. J. A. FAIRCHILD et al., Appellants.
Corporations—Action by Stockholders — Expenses oe Litiqation — Finding—Appeal—Specification not Discussed in Brief.—In an action by the stockholders of a corporation to compel the restitution, by the majority of the directors of the corporation, of moneys which were alleged to have been illegally expended by them, a finding that they had paid expenses of a litigation against the corporation which ought to have been borne by them individually, will not be disturbed upon appeal, under a specification of insufficiency of the evidence, which is not discussed in the appellants’ brief.
Id.—Meeting of Directors—Quorum not Formed by Interested Person.—At a meeting of the directors of a corporation, a legal-quorum cannot be formed by the presence of an interested director, so as to authorize or ratify any action taken in his favor as general manager.
Id.—Services Rendered by Director and Vice-President as Manager—Absence of Contract or Resolution—Payment of Reasonable Value—Credit.—A person chosen as a director and also as vice-president and manager of the corporation, without any express contract, by-law, or valid resolution, fixing compensation for his services as manager, who performed numerous and onerous services as manager, which occupied his entire time, and which were highly valuable, and of such a character as to preclude any reasonable supposition that they were intended to be gratuitous, was entitled to be paid the reasonable value thereof; and in an action by a minority of the stockholders to recover an amount of money paid him as manager from the funds of the corporation without any valid resolution for such payment, in the absence of proof of fraud or gross negligence of the directors defendant, they are entitled to be credited with the reasonable value of the services rendered. [Harrison, ,T., Temple, J., and Beatty, O. J., dissenting.]
Id.—Presumption of Gratuitous Services of Director, when Inapplicable—Implied Contract for Other Services.—The presumption that directors of corporations render their services gratuitously, in the absence of a previous express contract, does not apply ' to onerous services, not pertaining to the office of director, which could not reasonably bo expected to be performed for nothing, although no compensation therefor was previously fixed; and in such case there is an implied agreement to pay what the services were reasonably worth. [Harrison, J., Temple, J., and Beatty, C. J., dissenting.]
Id.—Evidence—Testimony op Manager—Profits of Mining Corporation—Royalties — Expected Dividends.—In the action by the stockholders, it was error to exclude the testimony of the manager, whose compensation depended largely upon the development of a mining corporation, which he was to control as manager, that, in addition to royalties per ton, anticipated by the organizers of the corporation, it was designed, intended, and expected by the directors that there would be large earnings or dividends.
APPEAL from a judgment of the Superior Court of the City and County of San Francisco and from an order denying a new trial. J. M. Seawell, Judge.
The facts are stated in the opinion of the court and in the dissenting opinion.
Frank Shay, and C. H. McFarland, for Appellants, other than George M. Ferine.
C. H. Wilson, and E. W. McKinstry, for George M. Ferine, Appellant.
Gunnison, Booth & Bartnett, for Respondents.

Opinion:
McFARLAND, J.
— The following parts of the opinion delivered in this case in Department Two, July 2, 1900, are hereby adopted: —
" It is averred in the complaint that each of the plaintiffs is the owner of at least five shares of the capital stock of the corporation defendant, the Bitumen Consolidated Mining Company, the capital stock being three hundred thousand dollars, divided into shares of one hundred dollars each, and that this action is brought on behalf of themselves and other stockholders. It is also averred that during the times when the alleged wrongs were committed, defendants Fair-child, Ferine, Walrath, and Miles were directors of the corporation defendant,—the whole number of directors being six, and the other two being plaintiff Bassett and one Swift. It is further averred that said defendants, being a majority of the board of directors, improperly expended certain moneys of the corporation; and the purpose of the action is to recover from them the amount of money alleged to have been thus expended. The court rendered judgment against Fair-child, Ferine, and Walrath for $10,729.90, which sum consists of $8,665.80 found to have been improperly expended, and legal interest thereon for several years; and against defendant Miles for $7,129.90 for money, and interest thereon, found to have been improperly expended by the directors by acts in which he participated. From the judgment and from an order denying their motion for a new trial the defendants appeal. The court found the appellants liable for $1,888.05, paid out by them as expénses incurred in defending a certain action brought in the superior court by the San Luis Bituminous Rock Company against the defendant corporation herein and certain others of the individual defendants herein. The ground of this finding is, that, owing to the nature of that action, the defendants therein, other than the corporation, should have borne the expenses of the litigation, and as this finding is not discussed in appellants' brief it may be dismissed without further notice.
" The chief item of appellants' liability allowed by the court, which is contested by appellants, is $6,475 paid defendant Fairchild for services as general manager of the corporation defendant before his compensation therefor had been fixed, which sum, with interest thereon, makes up the main amount of the judgment. The record shows that after the case had been submitted to the trial court, that court made an order on August 29, 1896, that judgment be entered for plaintiffs for $1,888.05 alone. (In a written opinion attached to one of appellants' briefs the learned judge of the lower court gives his reasons, which we think are exceedingly cogent, for not allowing judgment for the $6,475 paid to Fairchild.) But after-wards the court made findings and ordered judgment for the $6,475 and interest, in addition to the said $1,888.05, and, under an amendment to the complaint, gave judgment, also, for an additional $332.25, which will be referred to hereafter, and ordered that $2,000 be allowed plaintiffs as a counsel fee, to be paid out of the judgment by a receiver who was appointed to collect the same.
" There is no averment, or proof, or finding of any fraud committed by appellants; but the theory of the complaint seems to be, that in authorizing the payment of the said money to Fairchild the appellants acted with gross negligence. The appellants admit the payment of this money, and justify it. The findings seem to follow the theory of the complaint; but so far as they may be construed to find that appellants were guilty of such negligence as would render them hable on the ground of negligence alone, or that they willfully intended to injure the corporation for their own personal gain, they are not supported by evidence. However, the findings on these points need not be closely scrutinized; for the order denying the motion for a new trial contains this language: ' There is no evidence in this case that either of the defendants Ferine, Walrath, or Miles acted for their own private gains. If any finding bears that construction, I regret it, and if it were necessary to support the judgment, I would grant a new trial. Neither, under my views of the law, is the finding as to negligence material. Ferine, Walrath, and Miles are held liable upon the ground that they voted money of the corporation to Fairchild without authority of law. If it be assumed that the corporation was indebted to Fairchild for past services, none of the defendants are liable for the money paid to him. . . . Upon the main question whether Fairchild had any legal claim for compensation before his salary was fixed by the board, I see no reason to change the views expressed by me in deciding the case.' It is apparent, therefore, that the judgment was based on the principle that the payment of the money to Fairchild was unlawful because it was paid before his salary as general manager had been fixed, and that—as will be seen hereafter—it was so entirely illegal and ultra vires that it could not be ratified nor made valid by any subsequent act of either the directors or the stockholders.
"The corporation defendant was organized in September, 1891. Its main purpose was to control the mining and marketing of bituminous rock to be taken from several different mines or deposits of bitumen. It appears that these several mines were mainly owned by the persons who formed the corporation defendant, and became its stockholders and directors. The corporation took leases from the owners of these several mines, by the terms of which it was to give them a royalty of one dollar a ton for every ton of bitumen taken from the mines. It seems quite apparent that the main profit which the organizers of the corporation expected to receive was to come through the royalty of one dollar per ton to be paid for the rock taken from the mines which they owned; and, in this connection, we think that the court erred in sustaining an objection to the question asked Fairchild on the witness-stand, whether, at the time of the organization of the corporation, 'it was designed, intended, or expected by the directors of the Bitumen Consoli dated that, outside of the royalties, there would he large earnings or dividends.' Immediately after the organization of the corporation, and in September, 1891, Fairchild was duly elected vice-president and general manager, and remained such during the time mentioned in the complaint. He immediately commenced to perform his duties as general manager, which duties were numerous and onerous, and occupied almost his entire time. The various kinds of work which he did as manager fully appear in the evidence, and need not be here given in detail; it is sufficient to say that his work included direction and supervision of the mining operations in the various leased mines; the supplies required; contracting for hauling rock from mines to cars; purchasing sacks for the rock; attending to shipping-receipts and collecting moneys; securing transportation facilities; chartering vessels for shipping rock to points on the northern Pacific coast; seeing that cars which came to San Francisco were properly loaded and delivered in proper shape to purchasers; looking after office management, and attending to all ' business of the corporation which came along from day to day.' Before his employment he had visited points as far north as Vancouver, British Columbia, in the interest of the use and sale of bituminous rock, and had become acquainted with public officials and others having control of street-paving, and was thus enabled to procure contracts with them for sale of the rock of the corporation. Th$re is no doubt that his services were highly valuable, and there is no doubt that they were of such a character as to preclude any reasonable supposition that they were to be gratuitous. But there was no resolution of the board of directors and no express contract determining what compensation he should have for his. services as manager, prior to November 9,1892; and for this reason it is contended by respondents that he cannot legally have any compensation prior to that date. Fairchild expected to receive compensation for his work as manager, the amount to depend somewhat upon the volume of business that would be developed, and the testimony of Walrath, president, and Ferine, treasurer of the corporation, shows that it was not expected by them or the other directors that he was to work gratuitously; moreover, his work as manager was done with •the knowledge of the directors, but there was no formal action taken on the subject until November 9,1892. Some time be fore that date, the president paid Fairchild, on account of his services, out of the money of the corporation, three thousand six hundred dollars; and on November 9, 1892, the board of directors passed a resolution which, after reciting that Fair-child had been in the employ of the corporation since its organization as managing agent and manager,' and had been paid by the president three thousand six hundred dollars for his services, declared that 'the acts of said president in advancing and paying said J. A. Fairchild said sum of thirty-six hundred dollars on account of his services be and the same is hereby approved, ratified, and confirmed.' There were present at this meeting four directors, who constituted a quorum; Fairchild was one of the four, but he did not vote on the resolution which was passed by the votes of the other three. At this same meeting a resolution was passed, reciting that Fairchild had been elected general manager in September, 1891, and had ever since been acting as such without having his salary fixed, and declaring that his salary 'be and the same is hereby fixed at the monthly sum of two hundred dollars per month from November 1, 1891, to April 1, 1892, and that thereafter he should receive a salary of seven hundred and fifty dollars per month, which should remain the same until changed by the board of directors.' On the tenth day of January, 1893, there was a general meeting of the' stockholders. At this meeting there were present stockholders representing 2,510 shares of the capital stock of 3,000 shares; and by a resolution adopted by a majority of the shares, exclusive of those represented by Fairchild, it was resolved 'that all the acts of the board of directors and officers of this company for the past year be approved and ratified.'
"The by-laws provide that 'the compensation and terms of office of all officers of the corporation (other than directors) shall be fixed and determined by the board of directors.' This language does not, on its face, mean that the compensation must be expressly and definitely agreed upon and settled before performance of the services; but respondents contend "that under the general law established by judicial decisions there can be no lawful allowance to an'officer of a corporation for services, no matter what their character and value, where the amount of the compensation had not been fixed prior to the rendition of the services. Many authorities on this subject have been cited on both sides, and they are to some extent conflicting. Most of those cited by respondents merely declare the rule that a 'director' as such, without some previous understanding, is not entitled to pay for services which are within the ordinary duties to be expected of him as director, although some of them, no doubt, apply the rule to other officers or agents who are also directors; but as to the last proposition the weight of authority and reason is the other way.
"As a general rule, when one person performs valuable services for another, whether the other be a corporation or a natural person, the law raises an implied promise to pay a reasonable compensation for the services, unless they are performed under circumstances which show an understanding that they were to be gratuitous. It frequently happens that one natural person performs valuable services for another natural person for which the former cannot recover, because circumstances show that they were rendered without any expectation of compensation. Now, it has been held that directors of corporations cannot, without previous express contract, receive compensation for such ordinary services as are usually rendered by directors without pay, for the common understanding, as declared by judicial decisions, is, that such services are presumed to be rendered gratuitously. But that presumption does not apply to those onerous services performed by officers and agents of a corporation, though they be also directors, for which compensation is usually demanded and allowed, and which could not reasonably be expected to be performed for nothing. The correct rule is stated by the United States supreme court in Fitzgerald etc. Const. Co. v. Fitzgerald, 137 U. S. 98. In that case, Fitzgerald, who was a director of a corporation and its treasurer, acted as superintendent and general manager, and, as such, did valuable work 'not at all pertaining to his office as director,' and the question was, whether he was entitled to compensation for such work done before any compensation was fixed. The opinion of the court states that the trial court ' instructed the jury that "if Fitzgerald, the" plaintiff, acted as superintendent, treasurer, or general manager of said company, and transacted the usual business that devolves upon such officer of such a concern as that, with the knowledge and consent of the defendant" (during the time before compensation was fixed), there would be an implied agreement on the part of the defendant to pay what the services are reasonably worth, and afterwards repeated this instruction more in detail, confining it to services as manager.' The verdict was for Fitzgerald, and the judgment was affirmed. The court said: 'The general rule is well stated by Hr. Justice Morton (since chief justice of Massachusetts) in Pew v. First Nat. Bank etc., 130 Mass. 391, 395: "A bank or other corporation may be bound by an implied contract in the same manner as an individual may. But, in any case, the mere fact that valuable services are rendered for the benefit of the party does not make him liable upon an implied promise to pay for them. It often happens that persons render services for others which all parties understand to be gratuitous. Thus directors of banks and of many other corporations usually receive no compensation. In such cases, however valuable the services may be, the law does not raise an implied contract to pay by the party who receives the benefit of them. To render such party liable as a debtor under an implied promise, it must be shown not only that the services were valuable, but also that they were rendered under such circumstances as to raise the fair presumption that the parties intended and understood that they were to be paid for; or, at least, that the circumstances were such that a reasonable man, in the same situation with the party who receives and is benefited by them, would and ought to understand that compensation was to be paidjor them." Tested by this rule, we think that the court fairly left it to the jury to determine whether Fitzgerald rendered services of such a character and under such circumstances that he was entitled to claim compensation therefor. It could not properly have been held, as matter of law, that he was not so entitled.'
"Rogers v. Hastings etc. Ry. Co., 22 Minn. 25, is a case directly in point. It is stronger in support of the proposition above stated than the case at bar, because the charter of the corporation in that case provided that the board of directors should appoint the officers 'and fix their compensation for the services to be rendered.' Rogers was a director, and was appointed secretary of the corporation, and also acted as its land commissioner and attorney, and sued for the value of services rendered in such capacities. There had been no compensation fixed, nor any contract made, before the services were rendered; and it was contended there, as here, that no compensation could be recovered for past services. But it was held otherwise. The court said, among other things, as follows: 'The evidence showed that the plaintiff, while acting as land commissioner, was a member of the board of directors. If his services as land commissioner had been performed by him simply as a director, it might be that he could not recover for the same, since, in the absence of a special agreement for compensation, he would, according to many authorities, be presumed to have acted gratuitously. But the duties and labors of a land commissioner of a land-grant railroad company do not necessarily nor presumptively pertain to a director as such. Indeed, it would be unreasonable to suppose that duties so onerous would be undertaken by one acting simply as a director without pay. For such extraordinary services, outside of and beyond his duties as director, a party may certainly recover, notwithstanding his directorship, for the reason that, even if he performs the duties of director gratuitously, these services are not a part of those duties.' (Citing cases.)
"In Henry v. Rutland etc. Ry. Co., 27 Vt. 435, there was a standing resolution of the board that a director should not receive more than two dollars per day for special services, yet a director was allowed to recover for services which were outside his duties as a director, in an amount much greater than could have been allowed under the resolution for services as director. The court said: ' There are services which may be rendered for the benefit of a corporation, the performance of which may be delegated by the directors to other persons. For that purpose the directors may employ, as their agents, those who are not members of the corporation, or they may employ one of their own number. A director is not incapacitated to discharge those duties and receive the same compensation which other agents would be entitled to recover. . In rendering those services the plaintiff was not acting in his official capacity as director, but as the agent of the corporation, and Ms compensation is no more limited by that vote than it would be if the services had been rendered by others who were not directors.'
"In Sawyer v. Pawners' Bank, 6 Allen, 209, the court, speaking of the circumstances under which the presumption arises that officers of a corporation are to be paid for their services, says: 'Such a presumption arises in reference to any species of work, labor, or employment which is usually and commonly the subject of Mre and reward, and paid for, whether any specific bargain is or is not made concerning it.'
" In Beach on Private Corporations (sec. 208), the author says: When the charter of a corporation provides that certain officers may be elected, and their salary fixed by a board of directors, and a president is thus elected, but without a salary named, the law raises an assumpsit on the part of the corporation to pay a reasonable compensation for his services rendered after election.' In Morawetz on Private Corporations (sec. 508), the author says: 'If a director is properly employed to perform services which do not pertain to his office as director, he is entitled to such compensation as has been agreed upon, or as the services are reasonably worth.'
" There are many other authorities to the same effect as those above cited, but they are too numerous to refer to here. (See Angell and Ames on Corporations, sec. 317; Pew v. First Nat. Bank etc., 130 Mass. 391; Chandler v. Monmouth Bank, 13 N. J. L. 255; Shackelford v. New Orleans etc. R. R. Co., 37 Miss. 202; Santa Clara Mining Ass'n v. Meredith, 49 Md. 389; Cheeney v. Lafayette etc. Ry. Co., 68 Ill. 570; First Nat. Bank v. Drake, 29 Kan. 311; Severson v. Bi-Metallic etc. Co., 18 Mont. 13; Felton v. West Iron Mountain Min. Co., 16 Mont. 81.)
"There was nothing decided in McCarthy v. Mount Tecarte L. & W. Co., 111 Cal. 328, that conflicts with the views herein-before stated. There the plaintiff, who was a director of the corporation defendant, sought to recover of the latter the value of services rendered without any previously fixed salary or compensation; and a judgment in his favor was reversed, merely because the trial court had erroneously excluded evidence offered by the defendant which ' tended to show the relations of the parties, . . . and to throw light on the question whether or not it was intended that he should have compensation.' The court referred to Barstow v. City R. R. Co., 42 Cal. 465,—which was also an action brought by a director to recover for services rendered before his compensation had been fixed,—and quoted from the opinion in the latter case as follows: 'The situation of the parties at the time—the relations, if any, in which they stood, of a business character, or otherwise—are important to be known and considered, in order to arrive at a correct solution of the ultimate question involved.' In neither the McCarthy case nor the Barstow case is there anything in the nature of a decision that there cannot be a re covery by an officer of a corporation, who is also a director, unless his salary had been previously fixed, but the contrary in both cases is assumed and necessarily decided. In the McCarthy case it is assumed that plaintiff could have recovered on ' an implied contract arising out of and inferable from the situation and relation of the parties'; and it is further said, that ' respondent, being a director of appellant, was not entitled to compensation for services rendered the corporation, unless the circumstances were such as to raise an implied assumpsit to pay what they were reasonably worth.'
"We conclude, therefore, upon the authorities above noticed, as well as upon reasonable and just principles, that Fairchild was not precluded from having a legal claim for the value of his services, merely because that value had not been fixed beforehand."
In the opinion delivered in Department it was held that the allowance of Fairchild's claim by the board of directors on November 9th was valid, notwithstanding the fact that the presence of Fairchild was necessary to constitute a quorum, and that, at all events, the allowance was an act that could be ratified by the stockholders, and that it was so ratified on January 10, 1893, as above stated. Since then it has been held, in Curtin v. Salmon River etc. Co., 130 Cal. 345, that there is no legal quorum of directors present when action is attempted to be taken on a matter as to which one of the directors necessary to make the quorum is interested. Assuming this to be the established law on the subject, and that, therefore, the resolutions of November 9th were invalid, and assuming also that the invalid action of November 9th could not be ratified by the stockholders, still, under the above views, Fairchild was entitled to receive compensation upon quantum meruit for whatever his said services were reasonably worth, and appellants should be credited in this action with an amount of money equal to the value of said services. (Buck v. City of Eureka, 109 Cal. 522.) In the latter case it was declared that the plaintiff should be allowed to amend his complaint, if so advised. In the case at bar an amendment would hardly he necessary, as the facts supporting a quantum meruit are fully stated; but if appellants be advised to amend their pleading in that respect, they should be allowed to do so.
It is contended by appellants that after the case had been submitted the court made orders allowing an amendment setting up a claim for about three hundred dollars for an entertainment to the board of supervisors of San Francisco at one of the mines (which appellants claim to have been legitimately expended in furtherance of the interests of the corporation), and an amendment setting up a claim for counsel fees of two thousand dollars, alleged to be reasonable, and also an order that these amendments "are deemed to have been by defendants denied," and that these orders were erroneously made. The record, however, does not clearly show that these things occurred in the manner asserted by appellants; and as a new trial is to be ordered, it is not necessary to consider them. Of course, appellants should be allowed to contest these new items of the entertainment and the counsel fees. The reasonableness of the counsel fees which were allowed need not he passed upon; the finding as to that may be different on another trial.
The judgment and order appealed from are reversed and the cause is remanded for a new trial.
Van Dyke, J., Henshaw, J., and Garoutte, J., concurred.
33 Am. Rep. 264.
18 Am. Rep. 584.
44 Am. Rep. 646.
80 Am. St. Rep. 132.