Court Opinion

ID: 5231862
Source: CourtListenerOpinion
Date Created: 2022-01-06 16:58:16.601831+00
Date Added: 2024-06-11T08:27:40.595704
License: Public Domain

Dowling, J. (dissenting):
Plaintiff, as a stockholder in the Electric Heat Storage Company, seeks an accounting from the defendants Hill and Matthews' for all moneys received by them from the company as salaries for the years 1911 and 1912. The corporation was organized in November, 1910, with five directors,- the plaintiff becoming the president thereof, with defendant Matthews as treasurer and defendant Hill as secretary. Under the by-laws of the corporation the duties of the various officers were fixed and determined, and no provision was made thereunder, nor by any-resolution of the corporation, for the payment of salaries to any officer or director.
On January 3, 1911, plaintiff resigned as president and Hill succeeded him as such. In August, 1911, by which time but $15,000 had been paid into the treasury of the company, a contract was negotiated by a committee consisting of Lewis, Lawrence and Hill, with the G-eneral Electric Company, whereby the latter paid $50,000 for a non-exclusive license to manufacture under a patent owned by the company,' and $25,000 thereof was paid to the Therol Foreign Patent Syndicate, the balance going into the treasury of the defendant corporation. On November 6, 1911, a meeting of the stockholders of the company was held, at which the president’s report was submitted, showing that the principal business done'up to that time *117had been the negotiation of the aforesaid license, and a trip abroad taken by the president in connection with the affairs of the company. The report of the treasurer was also submitted, in which appeared an item of “ Labor, $8,788.32.” When this was objected to by the plaintiff it developed for the first time that the defendants Hill and Matthews had been drawing salaries as president and treasurer respectively for the year 1911, the payment to the former being at the rate of $7,200 a year, and to the latter at the rate of. $2,500 a year. The first payment on these salaries was made June 15, 1911, amounting to $1,800 to Hill and $625 to Matthews.
It is conceded that at the time of such payments there was no resolution, either of the stockholders or of the board of directors' authorizing the same, or any provision of the by-laws requiring or permitting the same.
On November 6,1911, the annual meeting of the stockholders of the corporation was held, at which a resolution was passed increasing the number of directors thereafter from five to seven. At the same meeting seven directors were elected for the ensuing year, including defendants Hill and Matthews. The certificate showing the increase in the number of directors in the corporation was filed in the office of the Secretary of State on N ovember twenty-first, and in the office of the clerk of the county of New York on November twenty-second. On November 21, 1911, the newly-elected board of directors of the corporation met, hut six directors being present. At that meeting a resolution was passed fixing the salary of the treasurer for the calendar year 1911 at $2,500, five directors voting therefor, and Matthews, the treasurer, refraining from voting. This resolution was offered on the motion of Hill, the president. Then Matthews moved that the salary of the president be fixed at $7,200 for the calendar year 1911, and on this motion, Matthews acting as temporary chairman, the vote was carried by five members, Hill refraining from voting. Upon motion of Mr. Lithgow, seconded by Mr. Barnes, it was resolved that the acts of the treasurer and president in making payments to the president and treasurer upon account of their respective salaries for the calendar year 1911 were ratified and confirmed. For the purpose of putting this resolution Mr. Conklin acted *118as temporary chairman, and it- was carried by a vote of four members, Hill and Matthews refraining from voting. Then on January 29, 1912, a special meeting of the new board of directors was held under the conditions to be hereinafter referred to, at which, until the further action of the board, the salary of the president was fixed at the sum of $600 a month, and the salary of the treasurer at the sum of $2,500 a year, payable monthly, such salaries to begin as of January 1,1912; also, the action of the treasurer in paying the president the sum of $600 as salary .for the month of January, 1912, was ratified and approved.
On February 2, 1912, a special meeting of the stockholders of the corporation was held, at which the action taken by the board of directors on November twenty-first in fixing the salaries for 1911, and that of January 29, 1912, fixing the salaries for 1912, was confirmed, 833 votes being registered in the affirmative, and none in the negative, certain stock being represented hut not voting.
With respect to the salaries for 1911 we think the determination of the court in holding the individual defendants liable on account thereof was clearly correct. There is no implied contract upon the part of the corporation to pay a director or officer for his services as such, and to form the basis for a recovery for such services there must be a pre-existing provision for the payment of such salary, either by resolution or under the by-laws, or proof that the director or officer expected to receive compensation for his services, and the corporation intended to pay him for such services. (Mather v. Eureka Mower Co., 118 N. Y. 629; Farmers’ Loan & Trust Co. v. Housatonic R. R. Co., 152 id. 251; Stout v. Security Trust & Life Ins. Co., 82 App. Div. 129.) In this case not only is there no proof of any such expectation or agreement as to salaries for the year 1911, but the very method adopted of concealing the payments made for that purpose under the deceptive description of “Labor,” sufficiently characterizes the whole transaction. Nor do we think that the stockholders, at their meeting held in January, 1912, had the power to ratify the action of the board in so far as it assumed to vote salaries for services rendered during the year 1911. The payment of salaries in the *119absence of an agreement has been declared to be against public policy (See cases supra), and it has been held that the power of ratification resident in stockholders applies to such acts as are voidable only, and not to such as are prohibited by law or against public policy. (Continental Securities Co. v. Belmont, 206 N. Y. 18.)
With regard to the salaries for the year 1912, a different situation is presented. Here both the directors and stockholders had notice that the officers insisted upon being paid for their services, and the directors had the right to vote a reasonable sum therefor. The exercise of this right, however, is attacked upon the ground that the board of directors as then constituted was an illegal board. This proceeds upon the theory that inasmuch as the increase in the number of directors did not become operative until the certificate thereof had been filed in the two offices where by statute it is required to be filed (Stock Oorp. Law [Consol. Laws, chap. 59; Laws o£ 1909, chap. 61], § 26, as amd. by Laws of 1909, chap. 421), and inasmuch as all the directors received the same number of votes and, therefore, no five persons can now he claimed to have been legally elected to the exclusion of the other two, the election of the new board of seven was a nullity and that the old board of five held over. In Matter of Dolgeville El. L. & P. Co. (160 N. Y. 500) it was held that the number of directors in a corporation was not reduced until after the filing of the transcript showing the action of the corporation in the two proper public offices. In Matter of Westchester Trust Co. (186 N. Y. 215) the case just cited was discussed, and it was held that the number of directors could not be deemed to be reduced until after the filing of the transcripts, and that the subsequent filing thereof does not relate back so as to make the election valid. As this election in question was held before the transcripts had actually been filed, it would, therefore, appear that the old board of five held over. But when the board held its meeting on January 29, 1912, at which these salaries were finally voted, the directors present were Messrs. Crosby, Barnes, Montross and Conklin. Of these only two were members of the old board, namely, Messrs. Crosby and Conklin. Barnes and. Montross, the other two, were new members of the board. The resolution fixing *120the salary of the president at $600 a month and that of the treasurer at $2,500 a year, therefore, received the votes of only two of the old hoard, namely, Crosby and Conklin. While- the minutes show that Messrs. Hill and Matthews arrived and were present during the further deliberations, this was after the resolutions in question had been passed, and the only salary question upon which they voted was that fixing the secretary’s at $500 a year, which is not in question on this appeal. We should be disposed to hold that if a majority of the old board voted favorably upon the resolution fixing the salaries for 1912, the ratification of their- action by the stockholders would not be subject to attack, but we see no way by which the vote of two out of five of the legally constituted board can furnish a proper basis to sustain such ratification. When the stockholders on February 2, 1912, ratified the action of the board of directors they did so without knowledge of the fact, either that it was a meeting of an illegally constituted board or that but two out of the five members of the old board were present at the time the resolution fixing the salaries for the president and treasurer was adopted; for, as a matter of fact, in the form in which it was submitted to them, the resolutions for the salaries for the three officers, president, treasurer and secretary, appeared consecutively and there was no information given as to who voted therefor nor who were present.
Under these conditions, therefore, we believe that the stockholders, not having before them full and complete information of the circumstances under which the board had acted, nor of the legal infirmity attending such action, could not knowingly or legally ratify the attempted action of the board, which was void.
For these reasons we believe the judgment appealed from is correct and should be affirmed in all respects, with costs to the respondent.
McLaughlin, J., concurred.
Judgment modified as directed in opinion, and as modified affirmed, with costs to appellants. Order to be settled on notice.