Kleinschmidt v. American Mining Co.

MR. CHIEF JUSTICE BRANTLY delivered the opinion of the court. While not questioning, but acquiescing in, the propriety of that portion of the decree which awards relief to Ellen Kleinsehmidt requiring the transfer to her of the Mady and Hoag certificates, the defendants contend that the complaint does not state facts sufficient to warrant any relief in other respects. It is said that it is defective in failing to allege facts showing that the plaintiffs had exhausted their remedy within the corporation, and that it must therefore follow that this action cannot be maintained. The relief sought is not against the corporation, but against the individual defendant directors who, it is alleged, have made a misappropriation of the funds of the company. It is alleged that prior to the bringing of the action the plaintiffs demanded of the board of directors that it require the defendant R. H. Kleinschmidt to refund to the company the sums of money retained by him on account of salary, and — 19 — that it refused the demand. This allegation is sufficient to show that, so far as this item is concerned, the plaintiffs could [1] not obtain relief by application to the board. But aside from this, sufficient appears to show that any application to the board would have been futile, because it could not reasonably be expected that the board, which was dominated by R. H. Kleinschmidt, and which permitted him to pursue the course he did, would take any steps to redress the wrong complained of. Under these circumstances any. demand upon the board was not necessary. “The law, which does not demand a request that a person or corporation sue him or itself, nor require the doing of any useless thing, as prerequisite to the accrual of a right of action, will therefore, in the circumstances here existing, permit the plaintiffs to maintain suit to undo or prevent the acts of directors or stockholders performed, or threatened to be performed, if such acts be, as to plaintiffs, ultra vires.” (Forrester v. Boston & Mont. etc. Min. Co., 21 Mont. 544, 55 Pac. 229, 353; McConnell v. Combination M. & M. Co., 30 Mont. 239, 104 Am. St. Rep. 703, 76 Pac. 194.) However, whether proper demand was made upon the board, even if the circumstances had required it, is now wholly immaterial, because the directors all joined in the answer, making common cause with R. H. Kleinschmidt and justifying their action in his behalf. Of course it was necessary [2] to make the company a party; for, though the action is prosecuted by the plaintiffs, and plaintiffs and defendants are the real adversary parties, it is prosecuted for the benefit of the company. (McConnell v. Combination M. & M. Co., supra.) That it is not alleged that the company is insolvent is not material. The right of minority stockholders to require the board of directors and the officers, to whom has been intrusted [3] the control of the affairs of the corporation, to account for property and funds misappropriated by them does not depend upon whether the corporation is insolvent or likely to become so. The directors are the agents and trustees of the stockholders, and they may be called to account for any misappropriation of property or funds in their hands, as such. — 20 — They are bound to the exercise of good faith in the administration [4] of their trust. They cannot be called to account for losses which are the result of mere error in judgment; nevertheless they may not divert the assets of the corporation to purposes wholly beyond the scope of their powers. Even within the scope of their powers they may not so direct affairs as to gain an unfair advantage or profit for themselves. In either case their conduct is a violation of their trust, and» is in law deemed a fraud upon the stockholders not assenting to it. (McConnell v. Combination M. & M. Co., 31 Mont. 563, 79 Pac. 248.) That the facts alleged do not warrant the issuance of an injunction is also immaterial. The decree does not grant injunctive relief. The same may be said touching the demand for [5] a receivership. While the decree indicates an intention of the court to appoint a receiver to hold and make disposition of such funds as may be found due from E. H. Kleinschmidt by the report of the referee, the appointment has not been made. When this shall have been done the defendants may have cause for complaint; but the order, when made, would be a special order after final judgment, and as such reviewable on appeal. We may-venture the remark, however, that resort to the appointment of a receiver to take charge of -and disburse the balance found due will be unnecessary, because the court may just as well direct the payment of it to the American National Bank for disbursement under the arrangement made for the payment of dividends following the cessation of operations by the company in 1898, and thereafter pursued until E. H. Kleinschmidt concluded to take charge of the company’s affairs. It appears that subsequent to the action by the board on September 5, 1904, ratifying the appropriation of E. H. Kleinsehmidt of $4,200 to the payment of part of his claim for salary, the board also ratified his further appropriation of $3,500 for the same purpose. It also by resolution fixed his salary at $300 per month, payable from January 5, 1898. Since it appears that E. H. Kleinschmidt kept the records of the proceedings at the directors’ and stockholders’ meetings well enough for all — 21 — practical purposes, and while so doing actually attended to all the correspondence of the company, giving his personal attention to the sales of ore and certain litigation in which the company became involved in connection with them, counsel for defendants contends that the finding that his services as secretary and treasurer were of no value is not sustained by the evidence. In any event, it is said that since, under the statute and the by-laws of the company, the board was authorized" to appoint such subordinate officers and agents as the business of the company should require, and to allow them suitable compensation, it was entirely within the purview of this authority for the board in its discretion to allow a salary for services already rendered, as well as for those to be rendered, and that, though the soundness of its judgment as to the amount allowed might be open to question, its action cannot be overturned, in the absence of allegation and proof that it was prompted by fraudulent motives. Under the circumstances here presented, the question whether the services rendered were reasonably worth the sum allowed is, in our [6] opinion, entirely immaterial. The real question is whether a director of a corporation is entitled to compensation for past services which he assumed to perform, and which he might perform as a director, without previous provision made therefor by some action of the board tantamount to a promise to pay. According to the rule announced in McConnell v. Combination M. & M. Co., in the original opinion (30 Mont. 239, 104 Am. St. Rep. 703, 76 Pac. 194), and affirmed on the motion for rehearing (31 Mont. 563, 79 Pac. 248), the board of directors has not the inherent power to vote a salary to any director. “The power to do so must emanate from the stockholders, from the statute, or from by-laws legally enacted. ’ ’ This rule is inflexible, and is recognized by the decisions and text-writers everywhere. (Eakins v. American White Bronze Co., 75 Mich. 568, 42 N. W. 982; Ashton v. Dashaway Assn., 84 Cal. 61, 7 L. R. A. 809, 22 Pac. 660, 23 Pac. 1091; Wood v. Lost Lake etc. Co., 23 Or. 20, 37 Am. St. Rep. 651, 23 Pac. 848; Kilpatrick v. Penrose Ferry Bridge Co., 49 Pa. 118, 88 Am. Dee. 497; Cheeney v. Lafayette, — 22 — B. & M. Ry. Co., 68 Ill. 570, 18 Am. Rep. 584; Pfeiffer v. Lansberg Brake Co., 44 Mo. App. 59; New York etc. R. Co. v. Ketchum, 27 Conn. 170; Hall v. Vermont etc. R. Co., 28 Vt. 401; Blue v. Capital Nat. Bank, 145 Ind. 518, 43 N. E. 655; 4 Thompson’s Law of Corporations, sec. 4862.) Equally inflexible is the [7] rule that the directors — the managing officers of the corporation — cannot legally vote themselves compensation for past services. (McConnell v. Combination M. & M. Co., supra; New York etc. R. Co. v. Ketchum, supra; Branch Bank v. Collins, 7 Ala. 95; Holder v. Lafayette, B. & Miss. Ry. Co., 71 Ill. 106, 22 Am. Rep. 89; Cook on Stock and Stockholders, see. 657.) [8] So, also, when a director voluntarily or by the direction of the board assumes to perform the duties of secretary or treasurer, without prearrangement by resolution or by-laws, or by contract, for compensation, he is not entitled to recover on a quantum meruit for past services, and any appropriation made by the board for such services is equivalent to giving away the assets of the corporation. (Cook on Stock and Stockholders, sec. 657; Butts v. Wood, 37 N. Y. 317; Silverton Min. Co. v. Haughwout, 44 Colo. 173, 96 Pac. 975; National Loan & Inv. Co. v. Rockland Co., 94 Fed. 335, 36 C. C. A. 370; Martin v. Santa Cruz W. Storage Co., 4 Ariz. 171, 36 Pac. 36; Brophy v. American Brewing Co., 211 Pa. 596, 61 Atl. 123; Holder v. Lafayette, B. & Miss. Ry. Co., supra; St. Louis etc. R. R. Co. v. O’Hara, 177 ill. 525, 52 N. E. 734, 53 N. E. 118.) There are cases which hold that a director may recover for services clearly outside of his duty as such, without any precedent resolution fixing the compensation to be paid for them. (Bassett v. Fairchild, 132 Cal. 637, 52 L. R. A. 611, 64 Pac. 1082; Taussig v. St. Louis etc. R. R. Co., 166 Mo. 28, 89 Am. St. Rep. 674, 65 S. W. 969.) We are not disposed to hold that under certain circumstances this may not be true. It was well said, however, in National Loan etc. Co. v. Rockland, supra: “From the employment of an ordinary servant, the law implies a contract to pay him. From the service of a director, the implication is that he serves gratuitously. The latter presumption prevails, in the absence of an — 23 — understanding or an agreement to the contrary, when directors are discharging the duties of other offices of the corporation to which they are chosen by the directory, such as those of president, secretary, and treasurer. ’ ’ Again, in Holder v. Lafayette, B. & M. Ry. Co., supra, in denying the right of a director to recover for past services as treasurer of the corporation, the court said: “The board of directors were in the possession of the funds and property of the corporation, and that body had entire control over it, and could disburse it as they chose, either by themselves, by one or more of their number, or by some other person not of the board of directors. Having done so through one of their members, we must suppose that they chose to regard it as a part of his duty as director. Had not such been the intention, it' seems to us that a salary would have been provided by a by-law or resolution.” We think the facts disclosed in this ease neither call for nor permit any relaxation of the general rule. The corporation never having elected to do business under the Code of 1895 or subsequent legislation, the powers of its board are determined by the Compiled Statutes of 1887 (Civ. Code 1895, see. 401 [Rev. Codes 1907, sec. 3816].) Under the Compiled Statutes of 1887 (Fifth Division, sec. 454), its board was authorized to adopt by-laws. It was also authorized to appoint such subordinate officers and agents as its business required, and allow them suitable compensation. (Section 482.) [9] It adopted by-laws providing for the appointment of a secretary and treasurer, but never at any time fixed their compensation. If at any time it had appointed as such officers stockholders or persons not connected with the directory, doubtless even in the absence of a previous resolution or contract, such subordinates would be entitled to compensation. No principle of public policy would have been violated, and the rule heretofore announced would not apply. Until R. H. Kleinschmidt assumed control of the business of the corporation, however, the duties of secretary had been performed by Albert Kleinschmidt without compensation. For five years and a half thereafter they — 24 — were performed by R. H. Kleinschmidt in the same way, no claim being made at any time, or intimation' given, that he intended to claim compensation. Under these circumstances the conclusion seems inevitable that he performed the services in his directorial capacity; and, having done so without previous understanding by himself and the board that he was to receive compensation, he was not' entitled to the amounts withdrawn from the funds of the company, and it was beyond the power of the board to ratify his action. Finally, counsel contends that the evidence does not sustain the finding that the amount expended upon the Crescent claim should be charged to R. H. Kleinschmidt as a misappropriation of the funds of the company, because it appears that the interests held therein by the brothers are held by them as trustees of the company and not in their -own right. It does not appear what the original source of title was, nor how the interests were acquired. Moreover, the evidence is in conflict as to the capacity in which they hold the title. Albert Kleinschmidt testified that the title was originally acquired with the purpose to convey it to the company, but that when the differences arose between him and his brother this purpose was abandoned. "While there is evidence tending to show that at one time the brothers treated their interests as belonging to the company, there is also evidence tending to show that both brothers considered their respective, interests as their own. There is nothing in the evidence to show that the funds of the company were used to acquire the title. Upon this condition of the evidence we cannot say that it preponderates against the finding. The decree and order are affirmed. !Affirmed. Mr. Justice Holloway and Mr. Justice Sanner concur.