Court Opinion

ID: 9717055
Source: CourtListenerOpinion
Date Created: 2023-08-26 06:56:54.73381+00
Date Added: 2024-06-11T18:23:50.909985
License: Public Domain

Dissenting Ópínion by
Mr. Justice Bell:
The majority opinion gives, unintentionally of course,, a completely distorted pictui’é of the facts, and consequently reaches an unjustifiable conclusion;
*442Lawrence H. Maguire, husband of the plaintiff, was manager of the business of Fibreflex Packing and Manufacturing Co. At his death on March 3, 1946, he owned 12 shares of Fibreflex stock which he left to plaintiff. The stock was then appraised at $450. The corporation had outstanding 40 shares of stock of which Mrs. Scheer owned 28 shares. Mrs. Scheer died in July, 1947, and her nephew, Arthur Osborne, became the owner of her 70% stock interest as well as President of the Company.
Charles A. Hofmann, one of the defendants, took over the management of Fibreflex in 1946 at a salary of $3900. a year. Joseph Hofmann was employed as an accountant at a salary of $1040. a year. On November 28, 1948, Charles Hofmann became Vice President, Treasurer, General Manager and a director of Fibreflex and Joseph Hofmann, the other defendant, became Secretary and a director. Plaintiff became a director on November 18,1950, in place of Mrs. Osborne. Under the Hofmann management, the Company made no profit in 1946 and 1947, practically none in 1948 and none in 1949.
On January 1, 1948, a second management agreement 1 was made between the corporation and the Hofmanns for a, four year period. Charles Hofmann was employed thereunder as General Manager at $3900. a *443year and Joseph Hofmann as accountant at $1040. a year. ■ In addition to the salary, one-half of the “net profits” of the corporation was to be paid quarterly, 40% thereof to Charles and 20% thereof to Joseph, and the remaining 40% to other employes in such proportion as Charles Hofmann should decide. No one except the Hofmanns ever received any payments under this agreement.1 The contract was approved by the stockholders on November 28,194-8; plaintiff was present at this meeting, but was not given a copy of the management agreement, although she requested it.
On November 29,1948 — obviously as part and parcel of their election as officers and directors and the approval of their management agreement the previous day — the Hofmanns entered into a written agreement with Osborne (owner of 28 shares of Fibreflex stock) to subsequently loan to the corporation $5,000., in consideration of which Osborne and the corporation agreed to immediately deliver to the Hofmanns’ attorney (Tompkins) a certificate for twenty-one (21) shares of corporation stock presently owned by Osborne. These twenty-one (21) shares were to be registered upon the books of the Corporation in the names of Charles A. Hofmann and Joseph C. Hofmann, Jr., as joint tenants with a right of survivorship, the shares to be held in escrow by Tompkins until the 30th day of June, 1957, *444on which date the stock certificate for 21 shares was to be delivered unconditionally to the Hofmanns or the survivor of them as the sole and absolute owners thereof.
The above mentioned second management agreement dated January 1,1948 was made by the Hofmanns as employes on the one hand and by Fibreflex by its President, Osborne, attested by Hofmann, Secretary, on the other hand. This agreement was not an every-day business transaction but a contract which was so unusual and extraordinary and of such a special character that it would naturally call for express authority from the Board of Directors or ratification thereof by the Board or by the stockholders. The President was only the agent of the Corporation, and the Hofmanns, who seek to charge the Corporation, must prove that the agent had express, implied or apparent authority to make the contract in question: Paper Mill Supply Co. v. Container Corporation, 301 Pa. 62, 67, 151 A. 588. However, the stockholders at a meeting on November 28, 1948 “affirmed the 2nd management agreement as per copy attached”. The agreement of January 1, 1948 was therefore ratified and validated by the above mentioned approval of the stockholders.
A third Hofmann management agreement was entered into on March 13, 1951 which, as we shall see, was illegal. On that date the Hofmanns’ profit-sharing agreement of January 1, 1948, which by its terms expired on December 31, 1951, was extended to December 31, 1961. The agreement was executed by Osborne, President, attested by Joseph C. Hofmann, Jr. as Secretary, on the one hand, and by Charles A. Hofmann and Joseph C. Hofmann, Jr. on the other hand. On the date of this agreement, the Hofmanns were not only two of the four directors, but were also Vice President, *445Treasurer, Secretary and General Manager of the Corporation, as well as the registered and equitable owners of 52% of the corporate stock. It cannot be gainsaid or controverted that this agreement was made by the Hofmanns with themselves. Furthermore, and even more important, such a contract was beyond the actual or apparent authority of the President and the Secretary (Joseph C. Hofmann, Jr.) of Fibreflex, and, not having been approved by the directors or by the stockholders, was voidable. It is clear that the additional compensation or net profits which the Hofmanns paid themselves thereafter and thereunder was not only so excessive and unconscionable as to make it voidable, but was likewise without authority and therefore void.
The Hofmanns, not content with giving themselves one-half of the net profits in addition to their salaries, computed (what they term) their additional compensation, by taking 50% of the corporate profits, before instead of after taxes. These taxes include Federal Corporation Income and Excess Profits Taxes, Pennsylvania Corporate Net Income Taxes, Capital Stock Taxes and Corporate Loans Taxes.
This additional compensation which the Hofmanns claim they are entitled to receive, based on net profits before taxes, is as follows:
C. A. Hofmann J. C. Hofmann, Jr.
; 3,133.91 | 1,566.96 1948
none none 1949
32,036.07 16,018.03 1950
57,094.12 28,547.06 1951
37,730.62 18,865.31 1952
30,514.52 14,347.25 1953
p After payment of this so-called additional compensation, amounts were paid into surplus as follows:
1948 $ 3,409.52
*4461949 none
1950 34,341.04
1951 31,015.44
1952 22,217.66
1953 19,340.10
The only dividends declared by Fibreflex in the eight years in which the Hofmanns managed the Company were declared on January 26, 1953, out of 1951 profits, and in October, 1953, out of 1952 profits, and totaled $4000., of which the plaintiff received the munificent total sum of $1200.
It is clear that the Hofmanns in this tiny corporation in which they were Vice President, Secretary, Treasurer, General Manager, and two out of the four Directors of Fibreflex, as well as the registered and real owners of over 50% of the stock, made (with Osborne’s assistance) on March 13,1951, an agreement with themselves under which they paid themselves in this three year period (1951-53) fixed salaries of $14,820. cash, plus a total additional sum of $187,097 cash,2 while the owner of 30% of the stock of the Corporation received $1200. Where a director enters into a contract with his corporation, the burden is on him to show that the contract was fair and reasonable and was not injurious to the corporation or its stockholders. Defendants attempt to excuse and justify these unconscionable payments by pointing out that the book value of plaintiff’s stock increased to $120,000. Hoivever, both they and the majority signally failed to point out that the book value of the Hofmanns’ 52-1/2% stock interest increased from 0 to $210,000. Defendants seem to forget *447that you can’t liv.e on book value; even a widow who is a mere stockholder can’t live on $150. a year. It may not be amiss to ask: Could any. agreement have been more unfair-and unconscionable? While it is true that the Hofmanns “made” the Corporation, isn’t it .equally true that they “milked” the Corporation?
. Justice Jones, in Weissman v. Weissman, Inc., 374 Pa. 470, 474-5, 97 A. 2d 870, speaking for a unanimous Court, said: “In Lutherland, Inc. v. Dahlen, 357 Pa. 143, 151, 53 A. 2d 143, we recognized that officers of a corporation ‘must devote themselves to the corporate affairs with a view to promote the common interests and not their own, and they cannot, either directly or indirectly, utilize their position to obtain any personal prop it or advantage3 other than that enjoyed by their fellow shareholders: [citing cases]. In short, there is demanded of the officer or director of a corporation that he furnish to it his undivided. loyalty; if there is pre-: sented to him a business opportunity which is within the scope of its own activities and of present or potential advantage to it, the law will not permit him to seize the opportunity for himself; if he does so, the corporation may elect to claim all of the benefits of the transaction. Nor is it material that his dealings may not have caused a loss or been harmful to the corporation; the test of his liability is whether he has unjustly gained enrichment.’4 See also §196, Restatement, Restitution, p. 804.” Under the principle set forth in that case (which was cited with approval in Weissman v. Weissman, Inc., 382 Pa. 189, 114 A. 2d 797, on pp. 192-193), defendants are certainly not entitled to any part of the $187,097. which they claim as net profits of the corporation for 1951-1953.
*448The majority opinion states that plaintiff is estopped to assert her claim at this late date because from 1946 onward she had annually received financial statements of the corporation showing the extra compensation paid the Hofmanns and these showed how the 50% ghare of the net profits was computed. Let’s analyze how accurate that statement is. In 19J¡6 and in 19J¡T and in 19J$, the Company made no profits. In 19J¡8 the profits were tiny. The record shows that financial statements were sent by the corporation to plaintiff commencing November 28, 1948. Plaintiff in December, 1948, requested permission to examine Fibreflex books “for claims which she thought she might have against the Company”. In October, 1952, plaintiff’s attorney wrote to defendants and made various demands which were rejected. The complete and conclusive answer to the alleged estoppel is (a) no rights of other parties have intervened; (b) defendants have not pleaded laches or estoppel; and (c) there cannot be ratification without full knowledge of all the material facts. Todd v. Skelly, 384 Pa. 423, 120 A. 2d 906; E. Girard Sav. & Loan Assn. v. Houlihan, 373 Pa. 578, 97 A. 2d 23; Fishman v. Davidson, 369 Pa. 39, 85 A. 2d 34 (1951); Schwartz v. Mahoning Val. Country Club, 382 Pa. 138, 114 A. 2d 78 (1955); Currie v. Land Title Bk. & Tr. Co., 333 Pa. 310, 5 A. 2d 168 (1939); Kelly, Murray, Inc. v. L. B. & T. Co., 299 Pa. 236, 149 A. 190 (1930); 2 American Jurisprudence, §350.
Moreover, if Judges cannot agree on what is an illegal corporation agreement, and what is meant by the term “net profits”, how could an inexperienced woman, ignorant of business and of tax and legal affairs, know she was being deprived and defrauded of her rights (1) by an ofdcers-directors’ agreement which was illegal and (2) by an interpretation of language *449(“net profits”) which must have been Greek to her?
Claims similar to those made by these defendants— but not nearly as outrageous — have beeu summarily rejected whenever they have arisen in other States (1) because of the conflicting interest of the Hofmanns and the unconscionable agreement they made with themselves on March 13, 1951; and (2) because the words “net profits” were construed to mean what I believe they always ha^e meant and were intended to mean, unless clearly otherwise provided, namely, net profits after payment of operating costs, business expenses and taxes. How can you possibly know whether you have a “net profit” until you know what taxes you have to pay?5
The effect of taxes upon the net operating income or profit of a corporation is so tremendous and so much a part of the thinking of all persons who are involved in the management or directorship of a corporation, that when the term “net profits” is used by persons who are directors or who are engaged in the management of a corporation, they undoubtedly mean profits remaining after taxes, unless a contrary intent is clearly stated.
In Neeson v. Sangamon County Mining Co., 316 Ill. 397, 147 N.E. 369 (1925) plaintiff filed a bill for accounting to ascertain the amount of money due him under a written contract of employment in which he was to receive “5% of the net profits” of the Company. The Court held that the net profits were to be determined by deducting from the gross receipts total ex*450penditures of and all taxes paid by the Company.
Fleischer v. Pelton Steel Co., 183 Wis. 451, 198 N.W. 444 (1924) was another case dealing with payment of additional compensation to a valuable employe. The resolution of the Board of Directors provided that he should receive, over and above his regular salary 5% of. the “net earnings” of the Company; and defined the term “net earnings” as being profits after, inter alia, all expenses incident to operation of the plant have been paid. Nevertheless, the Court held that the Company had no net earnings until the tax liabilities were deducted and paid.
In Swaller v. Williamson Milling Co., 116 Kan. 329, 226 Pac. 1001 (1924), the contract with plaintiff-employe provided that plaintiff was to get a certain portion of the “excess earnings” of the Company. This agreement specified certain deductions for operating business expenses before there would be excess earnings. Nevertheless, the Court held that the federal income tax was an operating business expense.
In Axell v. Axell, 114 Cal. App. 2d, 248, 250 P. 2d 182 (1952), the question involved the proper interpretation of a final divorce decree which directed the husband to pay his wife 25% of any and all “net profits” in. excess of f4800. In determining net profits, the Court deducted from the husband’s gross income, the federal and state income taxes paid by him.
Lowenstein v. Bechtold Co., 326 Mo. 1089, 246 S.W. 2d 780 (1952) likewise dealt with the interpretation of the words “net profits”. The plaintiff-lessor in that case sought a declaratory judgment which would interpret the words “net' profits” as used in the lease to mean profits before deduction of income taxes. The Court held this contention was devoid of merit and decreed that the term “net profits” meant profits after *451income taxes. The opinion noted that there are many cases containing observations that federal income and excess profits taxes are generally considered as operating expenses of business.
Compare also, Sheasley Trust, 366 Pa. 316, 77 A. 2d 448, where Justice, now Chief Justice, Steen said (p. 320) : “The trustees were to pay to the settlor’s children the net income or profits derived from the property. The 'net income’ of real estate is only that portion which remains after the payment of taxes, repairs and commissions, ...”
To summarize: I would hold that the Hofmanns were entitled (1) to their salaries each year in question and (2) to 50% of the net profits after taxes for the years 1947, 1948, 1949 and 1950. I would further hold the Hofmanns were not entitled to any net profits for the years 1951 to 1953 inclusive because the agreement they, as directors and officers, made with themselves as individuals on March 13, 195.1, was so unconscionable as to be voidable, and (b) being beyond the actual or apparent authority of the President and Secretary of the Corporation and never having been approved or ratified by the stockholders or directors was voidable or void.

 It is unnecessary to mention the first management agreement of 1947 sinóe its only relevancy would be to point out that the Hofmanns deprived the other employes of Fibreflex, just as they deprived under the amendment to the second agreement, aU other employes of - Fibreflex of the “additional compensation” to which they were entitled by the express terms of the agreements. The Resolution which 'Was- adopted at a - Directors’ Meeting of. Fibreflex on December 30, 1950, at which the Hofmanns and Osborne .were the only directors, present, provided that all employes except the Hofmanns should, in Hofmann’s discretion, be excluded from sharing in the additional compensation.-

 It is unnecessary to mention the first management agreement of 1947 since its only relevancy would be to point out that the Hofmanns deprived the other employes of Fibreflex, just as they deprived under the amendment to the second agreement, all other employes of Fibreflex of the “additional compensation” to which they were entitled by the express terms of the agreements. The Resolution which was adopted at a Directors’ Meeting of Fibreflex on December 30, 1950, at which the Hofmanns and Osborne were the only directors present, provided that all employes except the Hofmanns should, in Hofmann’s discretion, he excluded from sharing in the additional compensation.

 Under the eight years oí Hofmann management they received salaries totaling $29,640. and additional compensation of $239,853. cash, while all of the stockholders received $4,000. of which plaintiff's share was $1,200.

 Italics, ours.

 Italics, ours.

 The majority opinion states that the agreement provided for quarterly payments, but fails to point out that the agreement further provides that if a loss is sustained in any quarter all quarterly losses must be made up before there can be $ny further distribution of net profits.