Opinion ID: 1880720
Heading Depth: 2
Heading Rank: 2

Heading: Salary and Rent Paid to Jo Ellen

Text: Jo Ellen and GRE's second argument on appeal is that the decision to pay Jo Ellen the salaries and rents she received was justified by the business-judgment rule. In keeping with our holding in Section A., supra, our analysis is confined to the salaries and rents paid to Jo Ellen from February 11, 2000, to December 18, 2001, i.e., within the two-year statute of limitations. Jo Ellen and GRE argue that the decisions to use Gold Rush funds to pay Jo Ellen's compensation and rent were made in conducting Gold Rush's internal business affairs and are therefore protected by the business-judgment rule. Poole contests Jo Ellen and GRE's invocation of the business-judgment rule, arguing that Jo Ellen's compensation was excessive and unreasonable. Alabama's business-judgment rule is stated best in Michaud v. Morris, 603 So.2d 886 (Ala.1992): `If in the course of management, directors arrive at a decision, within the corporation's powers ..., for which there is a reasonable basis, and they act in good faith, as the result of their independent discretion and judgment, and uninfluenced by any consideration other than what they honestly believe to be the best interest of the corporation, a court will not interfere with internal management and substitute its judgment for that of the directors to enjoin or set aside the transaction or to surcharge the directors for any resulting loss.' 603 So.2d at 888 (quoting Roberts v. Alabama Power Co., 404 So.2d 629, 631 (Ala.1981), quoting in turn H. Henn, Law of Corporations § 242 (2d ed. 1970)). Unless a court finds the existence of either bad faith or the absence of a reasonable basis, a court is loath to interfere in the decisions of a business. Smith v. Dunlap, 269 Ala. 97, 102, 111 So.2d 1, 4 (1959). However, a court need only conclude that one of those two conditions exists for it to disallow the defense and to assess the conduct of the business. In its order, the trial court concluded that Jo Ellen, as director of Gold Rush, paid herself excessive and unreasonable rents and salaries. The court did not speak to whether Jo Ellen acted in good faith. Unless we conclude that the trial court erred in its finding that the salaries and rents paid to Jo Ellen were excessive and unreasonable, we need not reach the issue of Jo Ellen's good faith or lack thereof. In evaluating compensation under the business-judgment rule, our inquiry is whether the compensation is so excessive that it bears no reasonable relation to the value of services rendered. Dunlap, 269 Ala. at 101, 111 So.2d at 4. `To come within the rule of reason the compensation must be in proportion to the executive's ability, services and time devoted to the company, difficulties involved, responsibilities assumed, success achieved, amounts under jurisdiction, corporate earnings, profits and prosperity, increase in volume or quality of business or both and all other relevant facts and circumstances.' Dunlap, 269 Ala. at 101, 111 So.2d at 4 (quoting Gallin v. National City Bank of N.Y., 152 Misc. 679, 273 N.Y.S. 87, 114 (N.Y.Sup.Ct.1934)). Jo Ellen and GRE argue that the trial court erred in concluding that Jo Ellen used Gold Rush funds to pay herself excessive and unreasonable salaries. The evidence presented to the trial court by both sides was weighty and well documented by experts. Jo Ellen and GRE's experts argued that although Jo Ellen may have been paid more than she was worth in the latter years of Gold Rush's operation, this was to make up for earlier years in which she was underpaid. They also argued that although Jo Ellen received from Gold Rush rent in excess of the market rate for the building she owned, the cost per square foot was less than that charged by an independent third party with whom Jo Ellen and GRE had formerly dealt. Poole's experts testified that the rent Jo Ellen charged Gold Rush was far in excess of the fair-market value. Concerning Jo Ellen's salary, they conceded that their analyses did not account for the fact that Jo Ellen was the office manager, an officer of the company, the controlling shareholder, and the sole director. They argued, however, that she was overpaid throughout her tenure as president of Gold Rush. Although this Court might conclude otherwise were it reviewing this evidence for the first time, it is our practice to defer to the trial court's findings of fact where that court has conducted a hearing at which ore terius evidence was presented. Thus, we are obliged to affirm the judgment of the trial court insofar as that judgment was based on its finding that the rents and salaries Jo Ellen paid herself were excessive. Therefore, we find the assertion of the defense of the business-judgment rule not well taken.