Denton Milling Co. v. Blewett

HODGES, J. This appeal is from a judgment in favor of the appellee for damages for the breach of a contract and for a sum due on three promissory notes, together with interest and attorney’s fees. The material facts are, in substance, as follows: The Den-ton Milling Company, the appellant, was organized about 20 years ago by G. H. Blewett, now dead, who' was the father of the appel-lee. It was incorporated with a. capital stock of $50,000, most of which was owned by G. -H. Blewett. Some of the stock he transferred to the appellee and other sons, and all of it passed to his widow and children upon his death, which occurred in 1917. [237] The business affairs of the corporation were under the management and control of a board composed of nine directors, of which. G. H. Blewett was in 1917 the president and the appellee the vice president. • At the beginning of the year 1916 the appellee had acquired some stock in the corporation, and at the instance of his father became its manager, and held that position under the contract' made with his .father till about- June 1, 1918. On that date, which was the beginning of a new fiscal year of the corporation, ■ the directors held a regular meeting. The appellee, as the vice president, became the presiding officer of the board, and called the. meeting to order. There were present six members of the board — one more than was sufficient to constitute a quorum. At this meeting the board elected a president, a vice president, and a secretary and treasurer for the following fiscal year. The appellee desired a better contract as manager than that under which he was then working, and then presented a demand to that effect to the board. After some discussion it was finally agreed that he should be employed for five years upon the following terms: He was to be allowed a salary of $3,000 per annum, and in addition thereto all net earnings -above a 10 per cent, semiannual dividend on the capital stock then issued, after a fair and just charge-off for depreciation of the plant and loss on bad accounts. The appellee continued as manager under that contract for three years. The first two years the mill was prosperous, and his profits, after paying the semiannual dividends and making the stipulated deductions, amounted to several thousand dollars. During the third year business was not so good. It seems that the profits did not amount to enough to pay the usual dividends, and the appellee got nothing for his services as manager beyond his salary of $3,000 for that year. The directors at their regular annual meeting at the close of that year demanded that the appellee pay into the treasury of the corporation, out of his previous profits, enough to supply' what was needed to pay the usual dividends on the stock. This he refused to do, and was thereupon discharged. He then filed this suit to recover $56,000 as damages for the breach of the contract, and also sought a recovery of $45,000 alleged to be due on three promissory notes theretofore executed by the company and held by him. . The appellant answered at some length. 'It denied the execution of the notes, alleging that thpy were issued without authority and by an employee under the influence of the plaintiff, and who had no power to bind the corporation by signing its name .to such contracts. The defense to the claim for damages here relied on is that the contract of employment was invalid because of the participation of the plaintiff in the proceedings of the meeting of the board at which the contract was made; that the contract was unreasonable and unfair to the corporation, and that the board of directors had no power under the by-laws to elect a manager for more than one year. The ease was submitted to the jury upon special issues, and the following is a summary of the findings: (1) The minutes of the Denton Milling Company contain all the provisions of the contract of employment; (2) the board of directors at that meeting acted in good faith, believing that they were serving the best interest of the company and its stockholders in making that contract; (3) the plaintiff, S. A. Blewett, did not exercise a controlling influence over the board of directors ; (4) the plaintiff sustained $30,000 damages by reason of his discharge; (5) the notes sued on represent an amount of money which the corporation owed the plaintiff for borrowed money and profits under his contract ; (6) the board of directors authorized, or ratified, the execution of the notes sued on. In addition to its defensive pleadings the appellant also alleged by way of a cross-action, that the appellee had while manager adulterated the output of the mill in a manner calculated to damage its business. Those issues were'also submitted to the jury and settled in appellee’s favor. The jury further, found that in making the annual settlements the appellee had not overestimated the assets of the corporation, and that no worthless claims were included in the estimated profits of the company. Upon those findings the court entered a judgment in favor of the appellee for the full amount of the note sued on, together with- interest and attorney’s fees, and for' $30,000 as damages for the breach of the contract. For convenience of discussion that portion of the judgment which awards damages for a breach' of the contract will be first considered. Logically the first question, then, is, Did the board of directors have the authority to bind the corporation in a contract employing a manager for more than one year? If, as contended by the appellant, no such authority existed,- for that reason alone the judgment for damages was wrong, and all other objections to the contract and to the court’s charge upon that phase of the ease may be treated as immaterial. The following is a copy of the material portions of the by-laws of the Denton Milling Company: “Article 1. “Section. 1. All meetings of the stockholders of this corporation shall be held annually at Denton, and a majority'of the capital stock issued shall constitute a quorum for. the transaction of business. ■ “See. 2.' It shall be the duty of the stockholders to pass upon reports of the directors, elect a directory for the ensuing year and transaction of any business that may properly come before them. ; . . .¡ [238] “Article 2. ■ “Section. 1. The directory elect shall meet and organize by electing- a president, vice president, secretary and employing a manager. “Sec. 2. The officers of the directory shall be ex-officers of the corporation. “See. 3. The fiscal or milling year shall be from June 1st to May 31st, inclusive. “Sec. 4. A majority of the directors shall constitute a quorum. ■ “Sec. 5. The directory shall hold its regulad meeting quarterly on Tuesday after the first Mondry in June, September, December, and March. “Article 3. “Section 1. It shall be the duty of the president to preside at all meetings of the stockholders or directors, shall sign all official papers requiring his signature, and shall cast the deciding vote in ease of tie. “See. 2. The president shall have general supervision of the business, power to call special sessions of either the stockholders or directors at his own option or upon written request of a majority of their respective membership. “Article 4. “Section 1. The vice president, shall exercise all the functions of the president in his absence. “Article 6. “Section 1. It shall be the duty of the secretary and treasurer to keep a complete record .of all meetings of the stockholders and directors and sign all papers requiring his official signature. He shall take charge of all funds or moneys belonging to the company and submit statements of receipts and .disbursements to the directors at their regular meetings. He shall, if required by the president make bond to the company for the faithful discharge of his duty. “Article 6. ' “Section 1. The manager shall have • special supervision of the business and employ or dismiss employees subject to the approval of the president. “Sec. 2. He shall submit to the directory at their regular meetings a quarterly statement of the business and at the end of the milling year an annual statement of all business of the corporation.” While these by-laws do not expressly provide that a manager shall not be employed for a longer term than one year, that seems to be a fair inference from the language used. The directors are to be elected annually by the .stockholders, and each newly elected board is directed to elect a new president,, who is to have the general supervision- of the business, and to employ a manager, who is to have special supervision. The direction to annually employ a manager is just as explicit as is the requirement to elect a president annually. Article 1159 of our Revised Civil Statutes provides that the business affairs of corporations of this character shan De carried on under the general direction of the board of directors. The manager, who has special supervision, is the creature of the board, and must' be the agent through whom the corporate duties of the directors are to be performed. Each new board is responsible to the stockholders for the manner in which the business is conducted, and should, in the nature of things, be free to-select its own agents. If one board of directors may contract with a manager for employment extending over a term of five years, they can materially handicap the freedom and power of their successors in. the management of the business of the corporation. The successful operation of concerns-of -this character must depend largely upon the efficiency of the manager. It is too obvious for argument that the financial welfare of-the corporation is best served by allowing each in-coming board of directors all the power they may lawfully claim. In construing ambiguous or obscure provisions of the by-laws we think that interpretation should be adopted which is in harmony with the general intendment of the governing regulations as a whole, and which is best calculated to promote the business welfare of the corporation. It is manifest that in' providing for a change in the directorate once every /ear it was intended to reserve to the stockholders the power to also control all those important agents upon whose efficiency the business success of the corporation depended. A general manager stands next to the president in the power of control. Upon his loyalty and efficiency the business success .of this corporation appears to have mainly depended. The stockholders could do little at their annual meetings toward removing an inefficient management of the affairs of the concern if so important an official as the manager could not be changed when,a change was needed. The following authorities, we think, sustain this conclusion: Llewellyn v. Aberdeen Brewing Co., 65 Wash. 319, 118 Pac. 30, Ann. Cas. 1913B, 667, and cases cited in notes; Beers v. New York Life Ins. Co., 66 Hun, 75, 20 N. Y. Supp. 788. As supporting the authority of the board of directors to contract for an employment extending beyond their terms of office, the appellee refers to 14A Corp. Jur. 72, and quotes the following language: “The fact that the directors are elected annually does not require that the term of an of- ■ ficer appointed by them shall be one year.” The cases referred to in the notes do not support that proposition in the text. We are of the opinion that under the by-laws of the appellant the board of directors'had no authority to enter into, the contract employing the appellee for a. term of five years as manager of the corporation.. It is unimportant that the same members were repeatedly elected as directors. The. validity of their action is to be determined239 by legal rules, and not by particular conditions that may exist. The fact that a new board is composed of the same individuals as the old board did not enlarge -the legal authority of the old board. It follows, then, that the appellee, having no valid contract entitling him to hold the place of manager for five years, has no cause of action because of his discharge. Hence he was not entitled to recover any damages for a breach of the contract. That conclusion obviates the necessity for considering other assignments relating to that portion of the'judgment. The next question is, Were the promissory notes sued.on valid and binding obligations of the corporation? The testimony shows, and the jury found, that those notes were signed “The Denton Milling Company, by E. K. Blewett, Treasurer.” The testimony further shows that E. K. Blewett executed the notes in that manner at the instance or request of the appellee, who was ’the real beneficiary and payee of the notes. While two .of the notes were made to' his wife and later transferred to the appellee, the real consideration was the amount of money due him by the company. The finding of the jury upon that issue is somewhat ambiguous. The court propounded the interrogatory in the following form: “Did the board of directors of the Denton Milling Company authorize the execution by E.. K. Blewett of the three notes herein sued on; or did said board ratify the execution of said notes?” The jury answered, “Yes.” But, even if-the finding of thp jury be disregarded as too ambiguous, we must assume that the court found all the essential facts required to support the judgment. The fact that the contract was invalid for a term of five years is not ground for impeaching its legal effect as fixing the compensation of the manager dur-. ing the time the contract was recognized by the board o’f directors. Upon testimony somewhat conflicting the jury found that the real consideration of the notes was in part money loaned by the appellee to the company and in part money which the company owed him for services previously performed under the contract. In deference to the verdict w;e must assume that this debt was just, unpaid, and was not subject to any offsets. The question remaining is, Did the treasurer, E. IC. Blewett, have the authority to .embody that indebtedness in the form of promissory notes which provided for the payment of the conventional rate of interest and for attorney’s fees in case of an enforced collection? Or, if there was no actual authority emanating from the board, did the board in legal effect ratify what E. K. Blewett had done? This conclusion of fact is assailed as unsupported by the evidence. The record shows that the appellee, while manager, and during the last three years of his term, made annual statements to the board of directors, disclosing the financial condition of the corporation. It cannot now be said that those statements were not fair and correct, and as full as the directors cared to have. Nor can it be said that any essential business detail was concealed. Those statements disclosed bills payable to the full amount claimed by the ap-pellee. There is no evidence tending to show that the directors inquired concerning the purpose for which the bills payable had been executed, or by whom they were signed, or to whom they- were payable. Items of this character and in this form had been carried in the reports for previous years. The members of the board knew that the by-laws had made no specific provision lodging the power to execute promissory notes in any particular individual. . They also knew whether they had expressly authorized the issuance of such notes. The president knew that he had not signed them. There was evidence tending to show that the treasurer had formerly signed similar obligations for the company, and that he' paid out the money in satisfaction of all its obligations. The treasurer was also a member of the board, and he knew every detail of this transaction. If the board did not know more it is because they did not make any further inquiries. These obligations of the company were not any more onerous because they were payable to the appellee, instead of to some other party. There appears no good reason why they should not be paid. We conclude that under the evidence and the findings of the jury the appellee is entitled to recover on the notes according to their tenor and effect. The judgmént of the trial court, however, will be reformed so as to eliminate the recovery of §30,000 as damages for the breach of the contract, and affirmed as to the amount of the ijotes, interest, and attorney’s fees. The costs of this appeal will be ad-judged against the appellee.