Court Opinion

ID: 8188712
Source: CourtListenerOpinion
Date Created: 2022-09-09 23:11:33.727973+00
Date Added: 2024-06-11T16:40:31.429416
License: Public Domain

The following opinion was filed November 7, 1906:
Kerwin, J.
The controversy arising upon this appeal so far as we regard it necessary to consider the questions pre*612sented may "be classified in a general way under tRe following-heads: (1) The note transaction; (2) the malt and whisky transaction; (3)' salaries of ’William and Anna M. Bergen-ihal; (4) pledge of warehouse receipts; (5) statute of limitations; (6) reduction of merchandise; (7) attorney’s fees paid out of corporate funds. The findings of fact present a complete history of the questions involved, and there is, with few exceptions, hut little dispute upon the facts. The findings respecting fraud upon the part of the defendants are-based more upon inferences drawn from admitted facts than from findings upon the controverted questions of fact.
1. It is undisputed that Anna M. Bergenthal received the-avails of the $16,747.96 note, and that it was not charged to her until long after it was received, as found by the court; but it is also established beyond question that she paid the-full amount of the note, together with interest. True, the transaction was not regularly entered, and if it had been the account of Anna M. Bergenthal would have appeared differently on the books, as found by the court: there would have been a large debit against her, which did not appear. But we are unable to see how the corporation was in any way injured by the irregular bookkeeping. The avails of the note simply did not appear on the account of Anna M. Bergenthal with the corporation, but she paid the interest by being charged in her account with the company as the same was paid upon the original note as well as upon all renewals. The loan was considered and treated as her loan, and aside from the irregular bookkeeping there seems to have been no attempt to conceal the facts from any one. In addition to paying the interest as it fell due upon the original note and all renewals thereof, Anna M. Bergenthal paid, December 2, 1893,, $1,247.96, leaving a balance of $15,500, which was on September 29, 1894, paid. So it appears that the whole amount of this note and interest was paid by Anna M. Bergenthal, and the only burden assumed by the corporation was that of *613loaning its credit in consequence of being a party to the note, and it does not appear that it was in any way injured by so doing. Counsel, however, claims that the transaction 'amounted in effect to the loaning of the money of the corporation to Anna M. Bergenthal, and that it was entitled to interest thereon. This contention, however, is not supported by the evidence. It is perfectly clear that the money was borrowed at the bank for the use and benefit of Anna M. Bergenthal, and immediately upon the execution of the note the whole amount was taken by her and the note given therefor always regarded as her obligation. It was in effect a loan from the bank for her use. Had the company paid the interest to the bank, of course Anna ill. Bergenthal would then be obligated to it for such interest, and the principal if paid by it. It is argued that if the avails of this note had been charged to Anna M. Bergenthal she would have had a much larger debit in her account with the corporation, and, under the mode of doing business and system adopted and carried on, would be paying interest upon such debt. But it was entirely immaterial to the corporation whether she paid interest to it, and it paid interest to the bank, or whether she paid the interest direct to the bank. The result to the corporation would be precisely the same. The effect of the bookkeeping respecting this loan was that the note transaction was kept off the account of Anna M. Bergenthal, and she paid the interest and principal, and the corporation lost nothing financially by the transaction. The court found, however, that the money was taken surreptitiously from the bank, and that the transaction was fraudulent. We do not think this finding is supported by the evidence. The history of this note transaction as established by the evidence shows that the irregularity of bookkeeping was with no fraudulent intent. It is quite obvious that if the purpose was to misappropriate the money of the corporation a different course would have been pursued. The note and the renewals were carried as the loan of Anna *614M. Bergenthal, and, although, the money was not charged to her when she received it, it was treated in all transactions thereafter as her loan and the note as her obligation, and never considered or treated as an obligation of the company. When the first interest fell due the bookkeeper was informed by William Bergenthal that the note was the obligation of Anna M. Bergenthal and not that of the company and the interest was accordingly charged to her, and all subsequent in-stalments of interest as they fell due were charged to her in her account on the books of the corporation. So it is not easy to see how William or Anna M. Bergenthal could have had any fraudulent purpose in mind or any intent to injure the William Bergenthal Company. "While resulting in irregular and improper bookkeeping, it worked out precisely the same as .though the avails of the note had at the time of discount been charged to Anna M. Bergenthal.
2. The court found that the so-called malt transaction was fraudulent, but we fail to discover any evidence establishing fraud. The court below obviously drew inferences of fraud from the nature of the transaction and course of dealing which we think are not warranted by the evidence. There is no evidence that the sale was not open and fair and at a reasonable market price. There can be no doubt but that William and Anna M. Bergenthal, because of their fiduciary relation to the corporation as officers and directors, owed the highest good faith, diligence, and endeavor to promote the interest of the William Bergenthal Company, but they were not prohibited from selling their property to the corporation, provided the transaction was open and fair. William and Arma M. Bergenthal constituted a majority of the directors and officers of the corporation. Their acts, therefore, in dealing with it must be closely scrutinized. But after careful examination of the evidence we fail to find anything tending to show that they did not so act in the utmost good faith. In 1894 Anna M. Bergenthal, through William, Bergenthal, sold to the cor*615poration 1,161 barrels of whisky which had been received in exchange for malt owned by her, and she was given credit on her account for said whisky at a fair market value, so the company, by the transaction, was buying whisky at its fair market value. Such a transaction, although carried out through the directors in disposing of their own property to the corporation, is valid. Spaulding v. North Mil. T. S. Co. 106 Wis. 481, 81 N. W. 1064; Milwaukee C. S. Co. v. Dexter, 99 Wis. 214, 74 N. W. 976; Franey v. Warner, 96 Wis. 222, 71 N. W. 81; Twin-Lick Oil Co. v. Marbury, 91 U. S. 587; Richardson’s Ex’r v. Green, 133 U. S. 30, 10 Sup. Ct. 280. The sale was not only for the fair market value, but was open and the transaction entered upon the books and known to the stockholders. The plaintiff admits that he had knowledge of the transaction as early at léast as 1895, but claims at that time he objected and that William Bergenthal promised to take the whisky off the hands of the corporation, but nothing was done to - carry out such alleged promise from 1895 to 1902. Moreover, during this time the company was buying whisky from other parties. In the purchase from Anna M. Bergenthal the company simply pursued its customary business policy, bought the whisky at a fair market price, and entered the transaction respecting it on the books of the corporation.- Under such circumstances there can be no inference of fraud. Lavassar v. Washburne, 50 Wis. 200, 6 N. W. 516; Baumann v. Lupinski, 108 Wis. 451, 84 N. W. 836; Burnham v. Burnham, 119 Wis. 509, 97 N. W. 176.
It is argued that the company was overstocked with whisky at the time of the purchase from Anna M. Bergenthal, and that William Bergenthal so understood and said in his report to the stockholders, in consequence of which the condition of the company was deplorable; but an examination of the reports and correspondence referred to shows that the complaint was based largely upon the falling off of sales, and not upon bad business policy in the purchase of whisky. As appears *616from the evidence, William Bergenthal purchased the whisky in question from Anna M. Bergenthal for the corporation, and on March 2, 1891, credited to her upon the books of the corporation $15,500 in payment for such whisky, which was the balance due upon the $16,147.96 note and its renewals. William Bergenthal obviously regarded this purchase as good business policy, and there is no evidence to show that it was not as fair and open and upon as fair terms as purchases of whisky from other parties. So it' must follow that, if any mistake was made which worked injury to the corporation, it resulted from error of judgment and not from any fraud on the part of William Bergenthal. There is abundance of evidence that in view of the nature of the company’s trade the purchase and holding of large quantities of whisky was good business policy. But, whether this be true or. not,/ courts cannot, in the absence of fraud, engage in regulating the conduct of the business of corporations' against the wishes, of a majority of the directors and stockholders, so long as the corporation is acting within the scope of its powers. As said in Gamble v. Queens Co. W. Co. 123 N. Y. 91, 99, 25 N. E. 202:
“It is not, however, every question of mere administration or of policy in which there is a difference of opinion among the stockholders that enables the minority to claim that the action of the majority is oppressive, and which justifies the minority in coming to a court of equity to obtain relief. /Generally the rule must bg that in such cases the will of the majority shall govern. [The court would not be justified in interfering even in doubtful cases, where the action of the majority might be susceptible of different constructions!] To warrant the interposition of the court in favor of the minority shareholders in a corporation or joint-stock association, as against the contemplated action of the majority, where such action is within the corporate powers, a case must be made out which plainly shows that such action is so far opposed to the true interests of the corporation itself as to lead to the clear inference that no one thus acting could have been in*617fluenced by any bonest desire to secure sucb interests, but that lie must have acted with an intent to subserve some outside .purpose, regardless of the consequences to the company and in a manner inconsistent with its interests. Otherwise the court might be called upon to balance probabilities of profitable results to arise from the carrying out of the one or the other of different plans proposed'by or on behalf of different shareholders in a corporation, and to decree the adoption of that line of policy which seems to it to promise the best results, or, at least, to enjoin the carrying out of the opposite policy.j This is no business for any court to follow.” Theis v. Durr, 125 Wis. 651, 104 N. W. 985; 2 Clark & M. Priv. Corp. 544 (a), and cases; Leslie v. Lorillard, 110 N. Y. 519, 18 N. E. 363; Hawes v. Oakland, 104 U. S. 450; Rothwell v. Robinson, 44 Minn. 538; Shaw v. Davis, 78 Md. 308, 28 Atl. 619; Waldoborough v. K. & L. R. Co. 84 Me. 469, 24 Atl. 942; Pratt v. Pratt, Read & Co. 33 Conn. 446.
The court found that the resolution passed ratifying this malfi-whisky transaction- was fraudulent, that William and Anna M. Bergenthal were interested parties, and that William dominated the stockholders and directors. But all the stockholders, except plaintiff, voted for the resolution. Furthermore, the transaction appeared on the books of the corporation from the time of sale and appeared continuously in the treasurer’s report, and was approved at each annual meeting by at least a maj ority of the stockholders. Besides, part •of the whisky was sold long before-this action was brought. It is quite clear from the evidence that had the agreement Referred to in the statement of facts respecting the payment •to plaintiff of three and one-half per cent, on his note to Anna M. Bergenthal been complied with, this action would not have been instituted, and that plaintiff’s real purpose in so •doing was not to forward the interest of the corporation but his own. So it can hardly be said that plaintiff occupies the position of an innocent stockholder so as to bring him within the right to invoke the aid of a court of equity when all other .stockholders are opposed to the maintenance of the action.
*6183. An annual salary of $6,000 to William, Bergenthal, president of the corporation, and $500 to Anna M. Bergenthal, secretary, have been paid since 1888. These salaries have been annually allowed by all the stockholders, including respondent. After the commencement of this action and in 1903 respondent presented a resolution to reduce the president’s salary to $3,000 and the'secretary’s to $25, which resolution was defeated by a vote pf 781 to 219 shares, and the salaries were again placed at $6,000 and $500 respectively, as formerly. True, respondent had an agreement with William and Anna M. Bergenthal that he should receive three and one-half per cent, upon his interest in the William Bergenthal Company so long as William Bergenthal’s salary remained at $6,000. It seems to be conceded by counsel for respondent that this agreement was void as against public policy, and there is very respectable authority so holding. Guernsey v. Cook, 120 Mass. 501; Fennessy v. Ross, 5 App. Div. 342, 39 N. Y. Supp. 323. Obviously, respondent’s objection is not that the salary of the president is too high, but that the president and secretary have failed to keep their agreement to pay him three and one-half per cent, upon his interest in the Williatm Bergenthal Company while the salary remained so fixed. Whether respondent has any claim for the three and one-half per cent, cannot be determined in this action. This is a personal, not a corporate, claim, and not one contemplated or authorized by secs. 3237-3239, Stats. 1898, under which this action is brought. South Bend C. S. P. Co. v. Geo. C. Cribb Co. 97 Wis. 230, 72 N. W. 749; Gores v. Day, 99 Wis. 276, 74 N. W. 787; Jenkins v. Bradley, 104 Wis. 540, 552, 80 N. W. 1025; Killen v. Barnes, 106 Wis. 546, 82 N. W. 536. The court below‘found that the respondent is entitled to have the salaries of William and Anna M. Bergenthal reduced or else have credit on his notes as agreed, and that the court should determine which relief be granted on the coming in of the referee’s report. All the stockholders, including re*619spondent, having voted to fix the salaries at $6,000 and $500 respectively, from 1888 down to the commencement of the action, respondent cannot now be heard in a court of equity on-behalf of the corporation in an action to reduce them because-of a personal grievance of his own. Killen v. Barnes, supra; Harrigan v. Gilchrist, 121 Wis. 127, 99 N. W. 909. In 1 Morawetz, Priv. Corp. (2d ed.) § 262, it is said:
“There is, however, evident propriety in refusing to allow a shareholder to sue on account of a wrong which he has voluntarily acquiesced in and condoned, even although the corporation might sue for his benefit. The plaintiff under these circumstances would have no meritorious cause of complaint, and he would be allowed to share in the benefits of a recovery by the corporation, merely because it would be impossible to separate his interest from the interests of the other shareholders. If the remaining shareholders should subsequently acquiesce in the transaction the corporation itself would be-bound and the entire cause of complaint be barred. Individual shareholders who have acquiesced should at least be disqualified from suing* where the other shareholders and the-company through its agents have taken no steps to assert its rights.”
4. William and Anna M. Bergenthal executed on November 6, 1901, two notes of $10,000’ each to the First National Bank of Milwaukee. The makers received the avails of one of these notes, and the proceeds of the other were received by the William Bergenthal Company and credited to it on the books of the company. To secure one of these notes the makers deposited 103 shares of the capital stock of the William Bergenthal Company owned by Anna M. Bergenthal. To secure the other were deposited warehouse receipts of the William Bergenthal Company for 1,414 barrels of whisky. The-regular form of collateral note used by the bank containing the provision that the collateral was deposited as collateral “for the payment of this or any other direct or indirect liability or liabilities of ours to said bank, due or to become due, that may be hereafter contracted or existing, however ac*620•quired by said bank,” was given. Tbis form of note in legal effect made tbe warehouse receipts collateral to tbe note, tbe proceeds of wbicb William, and Anna M. Bergenthal received. During tbe trial tbe bank executed and delivered an instrument canceling so much of tbis collateral agreement as provided that tbe warehouse receipts be applied or held as security for any individual indebtedness of tbe makers. Tbe court” below found that tbe pledge of these warehouse receipts was fraudulent in law, and that plaintiff was entitled to an injunction restraining William and Anna M. Bergenthal from using tbe credit or property of tbe corporation for private purposes. We cannot discover from tbe evidence that there was any intention to defraud in tbe pledge of tbe warehouse receipts. It seems tbe clause making them collateral to individual indebtedness was an unconscious error, promptly corrected when discovered, and it does not appear that tbe company was injured thereby. There is nothing in tbe evidence indicating that defendants threatened or intend to use tbe company’s credit fraudulently or to its injury, and under such circumstances tbe injunction should not have been awarded. Cobb v. Smith, 16 Wis. 661; Quin v. Havenor, 118 Wis. 53, 94 N. W. 642.
5. Whether tbe note transaction or tbe malt and whisky transaction resulted in any wrong to tbe corporation, or whether tbe findings of fact in regard thereto are supported by tbe evidence, we deem wholly immaterial, because it is •clear that if any cause of action ever existed respecting these claims the same is barred by tbe statute of limitations. Conceding these transactions to have been fraudulent, there can be no doubt tbe William Bergenthal Company could immediately after tbe sale of tbe whisky to tbe corporation have repudiated tbe transaction and sued at law for damages, or brought an--action in equity to avoid tbe sale and to restore tbe corporation to its former rights, and either action would have been barred in six years from tbe time tbe right of action accrued. Buttles *621v. De Baun, 116 Wis. 323, 93 N. W. 5; Boyd v. Mut. F. Asso. 116 Wis. 155, 90 N. W. 1086, 94 N. W. 171; Pietsch v. Milbrath, 123 Wis. 647, 101 N. W. 388, 102 N. W. 342; Kane v. Bloodgood, 7 Johns. Ch. 90. Where the remedy at law and that in equity axe concurrent upon the same state of facts the action in equity is barred, irrespective of the discovery of the facts constituting the fraud, when the action at law is barred. But where the action is one for relief upon the ground of fraud in a case which was on or before the 28th day of February, 1857, solely cognizable by a court of chancery, the cause of action is not deemed to have accrued until the discovery by the aggrieved party of the facts constituting the fraud. Subd. 7, sec. 4222, Stats. 1898. The right of action, therefore, having accrued at least as early as 1895 is, in any event, governed by the six-year statute, and was barred in 1902 when this action was commenced. We think the action before us is one for relief upon the ground of fraud in a case where law and equity have concurrent jurisdiction, and is governed by Boyd v. Mut. F. Asso., supra, and Pietsch v. Milbrath, supra. But if it be conceded, as claimed by counsel for respondent, that the action is one cognizable solely by a court of equity, we cannot see how the respondent is in any better position, since in such case the cause of action would be barred within six years after the discovery of the facts constituting the fraud, under subd. 7, sec. 4222, Stats. 1898. As we understand the argument of counsel for respondent it is claimed that the particular kind of action here brought is not one falling within the concurrent jurisdiction of law and equity, because ante-cedently to the statutes upon the subject the jurisdiction was vested exclusively in courts of chancery and has always so continued, and that the power given by sec. 3237, Stats. 1898, is such power as can only be exercised by a court of equity. But subd. 7, sec. 4222, Stats. 1898, is expressly made to apply generally to causes of action which before the Code were solely cognizable by a court of chancery, where the relief *622sought was upon the ground of fraud, and makes the limitation six years after the discovery of the facts constituting the fraud. So it seems to us that, upon any theory of the case, the action must he barred, and we are unable to see that it would make any difference whether, in an action brought under this statute against a corporation, various and different causes of action might be asserted, provided in such action the right of recovery was primarily based upon fraud and the relief sought upon that ground. Of course, in the’ case at bar the right to any of the relief prayed for must necessarily depend upon whether the officers of the corporation were guilty of fraud. The alleged cause of action to reduce the salaries and the claims made in consequence of the so-called note transaction and malt-whisky transaction are based upon fraud, and the relief sought in the action respecting accounting, reduction of stock, and appointment of receiver are incidental to the question of fraud. So the cause of action here must stand or fall upon the question of fraud.
But it is argued that because of the fiduciary relation existing between the corporation and its officers, and the system of mutual charges and credits kept between the corporation and Anna M. Bergenthal, the right of action did not accrue in favor of the corporation until not only a demand had been made, but there was a refusal or neglect of the agent to comply with the demand, and that “here no demand could have been made by the corporation and there was no refusal until 1902.” It is established in the case, however, that the directors and at least a majority of the stockholders, including the respondent, knew of the alleged fraud as early as 1895, the dealings respecting the malt and whisky transaction and the salary transaction being the ones upon which respondent’s right of action, if any,, rested. There is evidence that in 1895 and thereafter the respondent made complaint respecting the malt-whisky transaction, and that defendant William Bergenthal promised to take the whisky off the hands of the corpo*623ration, but that this was never done, and the fraud, if any existed, was discovered as early as 1895, and upon any theory of the statute of limitations the right of action then accrued. The contention made by counsel for respondent that the right of action did not accrue until demand and refusal in a case like the one at bar has been repudiated by this court. Boyd v. Mut. F. Asso. 116 Wis. 155, 90 N. W. 1086, 94 N. W. 171; Buttles v. Be Baun, 116 Wis. 323, 93 N. W. 5; Pietsch v. Milbrath, 123 Wis. 647, 101 N. W. 388, 102 N. W. 342. The cases cited by counsel for respondent upon the proposition that an action by the principal for accounting is not barred so long as the fiduciary relation continues are not applicable. They rest mainly upon the doctrine that concealment of fraud postpones the operation of the statute, or upon some other relation existing between the agent and principal which prevents the bringing of notice home to the principal, in actions solely cognizable by courts of equity. Kane v. Bloodgood, 7 Johns. Ch. 90; Teasley v. Bradley, 110 Ga. 497, 35 S. E. 782; Wilson v. Miller (Va.) 51 S. E. 837; McHarry v. Irvin’s Ex’r, 85 Ky. 322, 3 S. W. 374, 4 S. W. 800; Coxe v. Huntsville G. L. Co. 106 Ala. 373, 17 South. 626; Danville, H. & W. R. Co. v. Kase (Pa.) 39 Atl. 301. Some of the cases cited by counsel for respondent hold that while the agent is in the performance of his duty his possession of money or property is presumed to be rightful and subordinate to the rights of the principal, and the statute does not begin to run until demand is made. But these cases can have no application here, where the action is based upon fraud of which the corporation had actual notice and the facts show that the acts of the agent are utterly inconsistent with an innocent construction. Buttles v. De Baun, 116 Wis. 323, 93 N. W. 5; Pietsch v. Milbrath, 123 Wis. 647, 101 N. W. 388, 102 N. W. 342. The contention that the action is to recover upon a mutual open account current cannot be sustained. The action is based upon fraud and not upon con*624tract, to wbicb tbe limitation of sec. 4226 applies. Tbis section manifestly bas reference to an action contractual in its. nature, based upon an obligation to pay tbe balance due upon an open account. We tbink it clear that secs. 3237-3239, Stats. 1898, under" wbicb tbis action is brought, are not based upon any right to enforce a contract obligation against the-corporate officers. So tbe only claims here wbicb constitute any basis whatever for an action under secs. 3237-3239 were barred by tbe statute of limitations at tbe time of tbe commencement of tbis action.
6. We tbink that no reduction of merchandise should be-ordered. We have heretofore referred to tbe doctrine that business policy or wisdom of officers of a corporation, when free from fraud and not ultra vires, should not be interfered with by courts where a majority of tbe stockholders and directors favor such policy. The judgment below reserved until the coming in of tbe referee’s report tbe question of necessity and extent of reduction. Tbe record does not present such a. case as to warrant interference by tbe court. There is no sufficient evidence to warrant tbe finding that tbe stock was carried fraudulently or for any unlawful purpose. On tbe contrary there is ample evidence to support a finding that it was. good business policy to pursue tbe course adopted. Bespond-ent admits that tbe question is one of business policy. Such mattei’S must be settled by the stockholders. As said in Durfee v. O. C. & F. R. Co. 5 Allen, 230:
“It may be stated as an indisputable proposition that every person who becomes a member of a corporation aggregate by purchasing and bolding shares agrees by necessary implication that be will be bound by all acts and proceedings within tbe scope of 'the powers and authority conferred by the charter, wbicb shall be adopted or sanctioned by a vote of tbe majority of tbe corporation, duly taken and ascertained according to law. Tbis is tbe unavoidable result of tbe fundamental principle that tbe majority of the stockholders can regulate and control tbe lawful exercise of tbe powers conferred on a. corporation by its charter.”
*625Tbe authorities are quite 'Uniform that iu the lawful affairs of a corporatiou it must be left to govern itself as to the wisdom or policy of pursuing one course or another in the conduct of its business. And to what extent stock shall be accumulated is ordinarily within the discretion of the managing officers of the corporation. Morey v. Fish Bros. W. Co. 108 Wis. 520, 84 N. W. 826; Trimble v. Am. S. R. Co. 61 N. J. Eq. 340, 48 Atl. 912; N. Y., L. E. & W. R. Co. v. Nickals, 119 U. S. 296, 7 Sup. Ct. 209; Park v. Grant L. Works, 40 N. J. Eq. 114, 3 Atl. 162; McNab v. McNab & H. Mfg. Co. 62 Hun, 18, 16 N. Y. Supp. 448; Burden v. Burden, 159 N. Y. 287, 54 N. E. 17; Storrow v. T. C. C. & M. Asso. 87 Fed. 612. We fail to find any evidence of bad faith or improper motive in the accumulation of merchandise or manner of carrying it, or any warrant in the record sufficient to justify the court in interfering.
7. Respecting the payment of attorney’s fees out of corporate funds in the defense of this action little need be said. Clearly, if no case is made against defendants it is not improper or unjust that the corporation should pay for the der fense of the action.
It follows from what has been said that the matters growing out of the so-called note and malt-whisky transactions were barred by the statute of limitations at the time of the commencement of this action; that the salaries of William and Arma M. Bergenthal were allowed, voted, and ratified by all the stockholders and directors, including respondent, and that he cannot be heard to question them in this action, and that his claim for percentage cannot be considered; that there is no evidence to warrant the finding of fraud in the pledge of warehouse receipts, nor sufficient evidence to justify interference by the court in reduction of merchandise; that the corporate funds were lawfully used in defense of this action. The respondent, therefore, has no cause of action, and the judgment below must be reversed.
By the Court. — The judgment of the court below is re*626versed, and tbe cause remanded witb instructions to dismiss tbe complaint.