Court Opinion

ID: 6820091
Source: CourtListenerOpinion
Date Created: 2022-07-23 19:06:11.376488+00
Date Added: 2024-06-11T16:04:05.485850
License: Public Domain

Hudgins, J.,
concurring.
The pleadings filed are irregular, but respondent waived the questions raised by his demurrer and elected to submit the case to the trial court on its merits. This election binds him in this court.
The principle governing the decision of this case is thus stated in Deford v. Ballentine Realty Corporation, 164 Va. 436, 180 S. E. 164: “It is settled that because of the relationship existing between an officer and a corporation, the officer cannot deal with the corporation at arm’s length, even though the other directors are acting for it. Such officer cannot deal with the corporation as a stranger, because the position of confidence which he holds enables him to acquire an intimate knowledge of the affairs of the corporation and to influence those associated with him in its management. Fletcher on Corporations, vol. 3, section 950. This, however, does not prevent an officer from dealing with a corporation, provided he does so in good faith and the sale is open, fair and honest. Howland v. Corn (C. C. A.) 232 F. 35.”
13 Am. Jur. 958, section 1005, states the same principle in the following language: “A director or officer of a cor*373poration is not absolutely precluded by his official position from dealing or entering into a contract with the corporation, nor is such a transaction void per se. While it is true, on the one hand, that where the directors or officers of a corporation deal with themselves as individuals, the transactions are subject to the closest scrutiny, under the most searching light of truth, and must be characterized by absolute good faith, it is also true, on the other hand, that where persons holding positions of trust and confidence in a corporation deal with the corporation, which is also represented by others, in entire good faith, fairness, and honesty, such transactions are not invalid and will be upheld.”
This principle, applied to three outstanding facts established in this record, renders it imperative to decide the case for plaintiffs.
First, Rowland occupied a dual fiduciary relationship to the stockholders of the corporation; that is, (a) he was one of five testamentary trustees who were charged with the duty of electing directors of the corporation, and (b) he performed this duty by voting the stock for himself as a director. It is true that the will gave him this power, but the fact that he used it to elect himself a director made it all the more imperative that he discharge the duty imposed by law upon a director with even more good faith and fidelity than usually pertains to the office.
Second, Rowland, prior to his assumption of this fiduciary relationship, had employed Thomas H. Russell as his representative to sell the merchandise manufactured by him to the corporation. The terms and conditions of this employment are set forth in two letters signed by Rowland. The pertinent part of one, dated January 15,1906, and addressed to Major Thomas H. Russell, reads: “The proposition for a 6% basis on all orders sent by you will be acceptable to me. I look forward with pleasure in having you representing me at your school.” The other letter was dated January 16, 1906, and addressed to Captain W. G. Kable. The pertinent part reads: “Yesterday A.M. I wrote Major Russell accepting his offer on a 6% basis. As all the orders *374from your place had come through you I desired to have your view on this matter, so when Maj. R. wrote he had seen you I closed the deal. * * *. Shall all orders hereafter for all goods be handled through the Major (Russell) ?”
Rowland testified that under this contract, made in 1906, he continued to pay Russell commissions after Captain Kable’s death. The total amount of the commissions so paid was about $67,000. His defense of his action is that, since the agreement was made with Kable’s consent, he felt authorized to continue the business relations with Russell after Captain Kable’s death. This explanation is not sufficient to justify the payments of commissions in view of the fact that the will changed the relation of the parties to each other and to the corporation. Rowland testified that, after 1920, the contracts for the purchase of uniforms from him were made by Colonel Russell, “either verbally or in writing, until the late years. The last few years the Board directed it by minute.” In other words, the buyer, whose duty it was to act for his corporation, was receiving compensation from the seller, who was acting for himself although a director in the same corporation. It thus appears that, when the contracts were consummated, the corporation, although one of the contracting parties, was not represented by a disinterested officer or agent.
Third, Rowland contends that the commissions were paid in return for separate and distinct services rendered Rowland. The weight of the evidence supports the conclusion of the trial judge, which is stated in this language: “The contention by and on behalf of the defendant that T. H. Russell ever rendered any material service for the defendant, other than making it practically certain that defendant should enjoy a monopoly of sales of goods to the school, is not only not supported, but, it seems to me, is refuted by the evidence, certainly as to any such services rendered after the death of Kable.”
One provision of the will imposed upon the testamentary trustees the duty to so vote the stock “as to cause the said corporation to employ * * * Thos. H. Russell as Principal of *375the Staunton Military Academy * * * so long as * * * Russell shall live and be able or desire to be so employed and shall conduct himself and the affairs of said office in a proper manner * * * the reasonable salary to be paid to him for his services * * * shall never exceed the sum of $10,000.00 per year * * *.”
Russell was disappointed because of the testator’s failure to make any provision in the will permitting Russell to acquire the military school in his own right. He was regarded as a very able educator and executive. The trustees and directors were anxious to carry out the wish of the testator to retain Russell as the principal. In order to do this these officers, immediately upon assuming the duties of office, raised Russell’s salary from $6,000 to $10,000, the maximum allowed under the will.
Notwithstanding the fact that Russell received the maximum compensation allowed under the will, he had other sources of compensation derived from his connection with the school.
1. W. H. Steele and others had been conducting as a private enterprise upon the school premises a canteen or store in which supplies were sold to the students and faculty. Within a short time after Captain Kable’s death Russell became a silent partner in this store. As such partner, his net profits frequently were in excess of $3,000 per year. After 1930, lárgely through Rowland’s influence, the profits of this store were transferred from the individuals to the corporation.
2. By advice and consent of the corporation court of the city of Staunton, Russell was paid $200 per year as testamentary trustee, and $2,500 per year as a member of the executive committee of the corporation. In addition to these sums, one year Russell received, along with the other directors, $1,000 for services rendered as a director. The allowance of this extra compensation shows that the board of directors and the corporation court of the city of Staun-ton construed the provisions of the will liberally in favor of Thomas H. Russell. It does not appear that either the *376directors or the corporation court were asked to rule upon the propriety of the executive head of the school receiving compensation from a director who was selling his own manufactured articles to the corporation.
It was the duty of the chief executive of the school to supervise all of its activities, particularly the purchase of uniforms, as it was from this source that the corporation derived approximately 80% of its profits. This conclusion is inescapable. When Russell, as chief executive, was making the contracts with Rowland for the purchase of these uniforms, he knew that he would be paid 6% commissions on the gross amounts of the contract price. He is bound to have been consciously or unconsciously influenced by knowledge of this fact. The corporation had a right to purchase uniforms from one of its directors and the director had a right to sell the corporation property owned by him, but, in order for such contract to be valid, the corporation must be represented by a disinterested officer or agent.
Rowland’s final contention is that the executive committee and the directors of the corporation knew and approved of his sale of uniforms to the corporation and his payment of commissions to Russell.
It is true that it was generally known by officers, employees and others that Rowland did have a monopoly on the sale of these articles to the school, but the payments to Russell were not made openly and aboveboard. Rowland’s checks to Russell were not sent by mail nor deposited in a local bank in Staunton. All of them were deposited to Russell’s credit in a bank in Philadelphia, and the deposits were immediately withdrawn by Russell. No reference is found in the minutes of the directors or the executive committee to the contract price of the uniforms or to the fact that commissions were paid to Russell. The fact that Russell represented Rowland in these specific matters was not known to J. M. Perry, attorney for the directors and the estate, until after the death of Colonel Russell, nor were these business relations officially brought to the attention *377of the corporation court of the city of Staunton, as were other matters of equal or less importance.
Mr. Perry testified, “I never talked with Mr. Rowland about that matter (payment of commissions) that I recollect until I was informed of the fact — which must have been after Colonel Russell’s death — and I thought then, and I think now, that if services were rendered and the dealings was open and fair, it was a legitimate payment.” This is a correct statement of the legal principle applicable, but, as heretofore pointed out, the evidence does not disclose that Russell rendered Rowland any service which entitled him to receive compensation therefor. Rowland stated that Russell took the measurements of the students for the uniforms, supervised their tailoring, received the uniforms upon their arrival at the school, and distributed them to the students. This is the entire service that Rowland claims Russell performed for him. The overwhelming weight of the evidence shows that, after Colonel Kable’s death, Russell confined his attention to giving, or supervising the giving of orders for the uniforms. This was a service he owed to the corporation and not to Rowland.
The trial court found that “the weight of the evidence is against the claim that the matter of the continued representation by Russell of Rowland in sales of uniforms to the school, was either formally or informally discussed with the directors so that all were fully advised of these dealings between Rowland and Russell.”
Many statements in the correspondence that passed between Rowland, on the one hand, and Russell, Steele and other employees of the corporation, on the other, warrant the conclusion that Rowland was opposed to and resented any efforts made by any officer or employee of the school to ascertain from other sources the market price or quality of uniforms required by the corporation. A careful perusal of these many letters leaves the distinct impression that Rowland thought that, by reason of his fiduciary relationship to the corporation, he was entitled to have a monopoly on the sale of uniforms to it.
*378All these facts and circumstances bring the case squarely within the influence of the principle cited. The question is settled in Virginia, and is settled in accord with the weight of authority, both English and American. Under the circumstances, I am compelled to concur in the conclusion reached by Mr. Justice Spratley.