Kreitner v. Burgweger

Lambert, J.: In form this action is for an accounting. It is brought by plaintiff as a stockholder of the defendant corporation both in an individual and representative capacity. By his complaint the plaintiff charges the unlawful appropriation of property and money of the brewing company by the defendants Burgweger and Bartholomay. He attacks many transactions and seeks herein an accounting by such individual defendants and restitution to the corporation. Since the organization of the brewing company the defendant Burgweger has been its president. He has devoted substantially his entire time to its business. Commencing at $2,000 per year, his salary has been gradually increased until in July, 1907, he was receiving $7,000 per year. Such increases to that amount are not questioned in this action. Bartholomay, about 1903, came into the employ of the corporation as a salesman. His salary began at $3,000, but coupled with it was an agreement that in case under his supervision the sales showed certain increases his salary should be increased to $5,000. The business did show this increase, and in July, 1907, the board of directors voted the payment to him of such increased salary from September, 1903. At the same time a resolution was adopted by such board further increasing Bartholomay’s salary to $10,000 per year and likewise increasing Mr. Burgweger’s salary to the same amount. In such attempted increase in salaries lies one of the chief grounds for complaint urged by plaintiff. — 50 — At all times since its incorporation the brewing company has had a directorate of three members and at the time of the adoption of these resolutions in July, 1907, both Bartholomay and Burgweger were members of that board, constituting a majority thereof, and their votes were essential to the adoption of the resolutions. The third director then on the board voted against such resolutions. It was conceded upon the trial that this resolution was ineffectual to increase to $10,000 the salary of each of the individual defendants, for the reason that their own votes were essential to the adoption of that measure. It has been held by the Special Term that the increase in salary to Mr. Bartholomay to $5,000 was lawful, being predicated upon a contract lawfully made at the time of his employment and fully performed by him. The lawfulness of that contract, and the power of the corporation to make it, cannot be questioned. The determination of the court below that Bartholomay performed this contract has support in the record. The corporation has received the benefit of that contract and must be held to have adopted and ratified it. As to such increase up to $5,000 we must sustain the Special Term. While it is not sought upon this appeal to justify the increases to $10,000 under the resolution of July, 1907, yet it is claimed that the services performed by the defendants Burgweger and Bartholomay were of the value of such increased salaries, and that the performance of such services for the corporation made an implied promise on the part of the corporation to pay therefor the reasonable value of such services. This contention presents the question of the application of the so-called quantum meruit rule to the facts in this case. Starting with the premise of invalidity of the resolution of July, 1907, we must admeasure the rights of these parties as though that resolution had not been adopted. Then we have these men performing certain specific duties under a contract whereby they were to receive therefor a stated and contracted compensation. Without other action than their own, without ratification from the stockholders, and without (so far as this record shows) any increase in or modification of their duties, they seek to take substantial increases in salary from the assets — 51 — of this corporation, against the protest of the minority director. Such a situation leaves no room for the application of the quantum meruit rule. The suggestion of an implied promise to pay the greater sum is negatived by the existence of the specific contract upon their part to accept a lesser sum. The existence of a specific contract cannot be reconciled with that of an implied contract involving the same elements. The two conceptions are antagonistic and all services performed while the specific contract exists must be conclusively presumed to have been performed thereunder. Especially is this true when such attempted increase was unattended by any increase in duties. Nor is added prosperity on the part of the corporation available as an argument in behalf of these defendants. Their retention of office obligated them to produce this result, if possible, and in so doing they but performed an obvious duty and one fully within the contemplation of their employment. That officers of a corporation may not, by action on their own part, increase their own compensation without a corresponding increase in duties is fully sustained by Jacobson v. Brooklyn Lumber Co. (184 N. Y. 152). In that case an increase in salaries was voted without additional duties or services. The Court of Appeals there unanimously held such increases to be unlawful, even though attended by increased assets and better financial standing on the part of the corporation. And still stronger is the case of Pew v. Gloucester National Bank (130 Mass. 391). In that case the president of the bank was receiving a stated Salary of $400 per year. The bank under took extensive alterations to its building and to the supervision of such the president devoted substantially all of his time. This obviated the necessity for employment of a superintendent. The services thus rendered were valuable. They, were beyond the ordinary duties connected with his office. Yet, in an action brought by him upon the theory of implied promise to compensate therefor, it was held that the existence of the express contract to pay him $400 fully negatived the existence of an implied contract to pay him" a greater sum and recovery above $400 was denied. There are a few decisions where increases in salaries have — 52 — been sustained by the courts under circumstances somewhat similar to those here. But in each of such, so far as disclosed by a careful examination, there will be found present some other and controlling element. Our attention is directed to Murray v. Smith (166 App. Div. 528) as being one of such cases. That case is clearly distinguishable in that the decision therein sustaining the increase in salaries is placed squarely upon the acquiescence of the corporation in such increase. The facts in our case do not permit the adoption of any theory of acquiescence. Such increases have been consistently and vigorously opposed. We are further cited to MacNaughton v. Osgood (41 Hun, 109) as being antagonistic to some of the views herein expressed. That case was reversed in 114 New York, 574. Further, as is pointed out in Godley v. Crandall & Godley Co. (212 N. Y. 121), that case stands alone, among the decisions of this State, for the doctrines therein enunciated. In view of its reversal and of its lack of support in other decisions, we do not feel compelled to follow it. This record presents no equitable reasons for modification of the strict rule of accountability existing in our law, as against directors of a corporation. Those officials stand in a fiduciary relation to both stockholders and creditors. Assets of the company coming into their possession they hold as trustees and they are to be held to the strictest rule of accountability to the beneficiaries of that trust. It is in recognition of this status of directors that our courts have uniformly held that the attempt by directors in control of a corporation to contract for such corporation with themselves individually, to their benefit, and to the detriment of the corporation, is presumptively fraudulent and in bad faith. (Billings v. Shaw, 209 N. Y. 265; Carr v. Kimball, 153 App. Div. 839; Sage v. Culver, 147 N. Y. 241; Pollitz v. Wabash R. R. Co., 207 id. 113, 124.) And this presumption of bad faith is further accentuated by the proof in this record. These majority directors have not evidenced the slightest good faith toward the minority stockholders. Every effort by a minority director to protest against their illegal actions and unlawful withdrawal of assets from — 53 — the corporation, has been met with dismissal from the board, and the election of a successor friendly to these defendants. Acquisition of detailed information of the internal affairs of this corporation was persistently refused and only procured by resort to mandamus. Although the total capitalization of this company is .but $250,000, and its stock has been paying but four per cent, these two majority directors have consistently refused to increase the dividends thereon, while accumulating a surplus approaching $700,000. Under their management and control they have withdrawn from the assets of this concern approximately $30,000, for which they are wholly unable to account beyond their general and evasive statement that it was expended for the corporation. Each has monthly withdrawn hundreds of dollars for which no accounting has been made, and the few instances where the expenditure of the money is explained at all only turn suspicion upon the disposition made of that portion unaccounted for. Large contributions in support of excise measures in a political campaign, valuable presents to customers and bartenders, ticket admissions to a prize fight, and entertainments of various and similar character, certainly do not approach the standard of lawful expenditures of trust moneys which justifies a court of equity in saying that such expenditures were lawful. And in further defiance of the protesting stockholders, since the commencement of the action, these defendants have voted still further and substantial increase in the salary of the defendant Burgweger. In fact these defendants have frequently taken the position that by reason of their holdings in and control of the corporation they were relieved from the obligation to account or heed the protests of the minority. This action is for accounting by persons in a trust capacity and the plaintiff has fully met his burden of proof when he traces the assets of the concern into their hands. The clear duty is then imposed upon them of fully accounting for all such trust moneys and they can receive credit upon such accounting only for such sums as they definitely show they have expended for a lawful purpose. Upon no theory of law or equity can they be credited with any moneys for which they cannot account. — 54 — It is suggested that uniform application of the rule prohibiting majority directors from increasing their own salaries may prohibit meritorious increase in a case where the vote of such majority is essential to the adoption of a resolution for such increase. Such a conclusion does not necessarily follow. A corporation is owned by its stockholders. The will of the majority of the stock directs its destinies. For reasons of business expediency, certain powers are delegated to the directors. But all of such powers emanate from the holders of the stock. And when, as in this instance, by reason of their personal interest, the directors are precluded from exercising some of such delegated powers then, of necessity, such power of action reverts to the source from which it came. It is urged, however, that in this instance it would have been futile to give a hearing to the minority stockholders, inasmuch as the defendants held a majority of the stock. Whether that is so or not, they had a legal right to participate in the decision of a question thus vital to the corporation. This they were denied. The course of action by the defendants clearly demonstrates that it was their purpose not only to deny á hear, ing to the minority owners of the corporation, but in defiance of the protest of their representative on the directorate to enforce payment of increased salaries in disregard of law. It is not necessary to follow this subject further. Bad faith is clearly shown. Their action was illegal. Further suggestion is made that the resolution of July, 1907, although invalid as affecting such increase in salaries, may be accorded effect as evidencing notice from the majority of directors of a termination of their former contractual status and thus the elimination of all obstacles to the application of the quantum meruit rule. Such was not the purpose or object of this resolution, and, even if it was, such could not be its effect. These men could not, by their own acts, unratified by the corporation, create between themselves and the corporation they represent any different contractual status in relation to their management of property in their hands as trustees. The conclusions reached necessitate further accounting in this action, and such should be had before a referee appointed for that purpose. Payments of salary to these two officials — 55 — over and above those salaries effective just prior to the adoption of the resolution of July, 1907, should be disallowed, except the increase to Mr. Bartholomay, up to $5,000. Upon such accounting the defendants Burgweger and Bartholomay must be disallowed all sums shown to be received by them for which they do not render accounting showing lawful disbursement thereof. The judgment appealed from should be modified by striking therefrom all the provisions thereof except those which adjudge a recovery against the defendants Burgweger and Bartholomay of $23,884.49, and against the defendant Burgweger of $1,273.83; and further modifying such judgment by making same interlocutory only, the amounts of such recoveries to be included in the final judgment herein. Such judgment should be further modified by embodying therein provision remitting the case to Special Term for the accounting indicated in the foregoing opinion, such accounting to be had by way of reference. Conclusions of law 3, 4, 5 and 9, as found by the Special Term, should be reversed. In view of the lack of good faith on the part of "the individual defendants, costs of this appeal and of the trial heretofore had herein should be awarded the plaintiff against the defendants Burgweger and Bartholomay. All concurred, Kruse, P. J., in a separate memorandum, except Foote, J., who dissented in part in opinion.