Independent Brewing Ass'n v. Klein

Mr. Justice Holdom delivered the opinion of the court. The controlling questions here argued and pertinent to our decision are: First, the jurisdiction of this court to entertain this appeal; second, the power of the court to appoint a receiver; and third, the right of Henry P. Klein to the relief granted by the decree, also that of those appellees here resting their claims upon such alleged right; and the underlying and subsidiary questions whether such rights have been waived by either the laches of Henry P. Klein in asserting them, his acquiescence in the acts now claimed to be wrongful, or by his affirmative action in taking an active part in causing to be done the several things about which lie now complains. First. We have no hesitation in declaring that the decree is a final one, from which an appeal is rightfully taken to this court. It settles all the claims made by the bill in the findings of the decree. The relief granted by the decree would have the effect, but for the perfecting of this appeal, to take the brewery corporation plant and property away from the control and management of its officers. It is a finality in terms as to all the questions involved. The bill by no averment seeks the dissolution of the corporation, and while the decree temporarily deprives the officers of the right of management and relegates its business and assets to the receiver, there is no intimation in either its finding or ordering parts that a dissolution is contemplated, but, directly to the contrary, the way is clearly open to a restoration of the corporate property to its lawful managers after the taking and settlement of the accounting. No franchise is involved, so far as the decree discloses, and it is to the decree we must look to determine that question. Chicago Steel Works v. Illinois Steel Co., 153 Ill. 9. It is the contention that a freehold is involved. This is likewise fallacious. There is no such result following upon the decree as entered, that one of the parties may gain and the other lose a freehold estate. Nevitt v. Woodburn, 175 Ill. 376. In case supra the Supreme Court dismissed the appeal, holding that a freehold was not involved, notwithstanding the bill in certain event invoked the power of the equity court to remove the acting trustee and appoint another in his place, which would operate to compel a conveyance of the real estate by the old to the new trustee. A case very similar to the one under review in many of its facts and the relief sought is Robertson v. Bucklen, 107 Ill. App. 369. The court was asked to set aside a sale of real estate made by a majority stockholder to the corporation, and to compel the stockholder who made the conveyance to return to the corporation the purchase money. This in effect is part of the relief claimed by Klein in relation to the real estate conveyed by the Ernsts to the brewing association. There, as here, like motion was made to dismiss on the ground that a freehold was involved, but the court denied the motion, as we have already done. We wish to emphasize in our discussion and determination of the matters involved in the second and third points, that it must be borne in mind that the corporation, the brewing association, at the time of the filing of the bill was a solvent, dividend paying, going concern, with ample assets with which to meet all liabilities, and a handsome balance of good assets amply sufficient to protect every stockholder to more than the extent of his investment, and that Henry P. Klein was a competent brewer, thoroughly familiar with the method and manner of operating the business of the association, and a director with a salary all the time during which every dereliction about which he complains occurred. That, with infrequent exceptions, he attended all the directors’ meetings and every stockholders’ meeting, and took an active, prominent part in shaping the policies of the association at all of them. Second. The power of a court of chancery to appoint a receiver of a corporation is confined to that given by section 25 of the Corporation Act, chap. 32, R. S., which is restricted to cases in which a dissolution may be brought about at the suit of a creditor. The power given to the court by the statute is to dissolve the corporation for “good cause shown,'’ and in the process of dissolution to appoint a receiver to marshal the assets, dispose of them, convert them into money and distribute the proceeds ratably among those whom the court shall decree entitled thereto. In such a proceeding all of the stockholders are necessary parties, for none other than the parties are bound by the decree. Coquard v. National Linseed Oil Co., 171 Ill. 480; Parmalee v. Price, 208 ib. 544. It would seem to be sufficient to observe that the bill does not ask, neither does the decree order, a dissolution of the corporation. It is therefore apparent that the appointment of a receiver cannot be maintained upon statutory grounds. It is, however, insisted that the appointment of the receiver can be sustained under the general powers vested in courts of equity to conserve the rights of parties menaced by the fraudulent actions and conduct of another, and that such powers are sufficiently broad to- justify the appointment of a receiver, when such action may be deemed essential to the protection of property rights involved. We do not regard it as necessary to a decision here to decide any such question, for whatever may be the law as to the jurisdictional authority of the chancellor to appoint a receiver in virtue of the general equitable powers vested in a court of chancery, we are convinced that the facts in this case do not warrant its exercise. The case of Black Diamond Company v. Waterloo, 62 Ill. App. 206, is peculiarly in point as to the extremity of the situation justifying the ousting of the officers of a corporation and the installing in their place of a receiver. To put the property of a solvent, going concern into the hands of a receiver is not to be tolerated except as a dernier ressort where no other course can be found which will furnish a sufficient corrective. True it is, as this court say in Young v. Rutan, 69 Ill. App. 513, “It is no slight matter for a court of chancery to lay its hands upon large business enterprises, take them out of the control of capacity and experience, and charge them with expenses and commissions. It should be done only when the court can point to the specific allegation or allegations sustained by credible evidence that will justify such action.” The frauds charged in the bill are confined to the real estate transactions, the payment to the executive officers of excessive salaries, and their borrowing money from the corporation without repayment of either principal or interest. The parties charged with liability for these alleged irregularities are not claimed by averment in the bill or found by the decree to be financially irresponsible, but, on the contrary, we infer from the record that all are abundantly able to make reparation if the court should so require, with the exception of J. W. Boldenweck, and he is no longer interested in the brewing association, and so far as his liability is concerned, nothing could result advanta-’ geously from the appointment of a receiver for a corporation in which he has no concern. An injunction to maintain the status quo and an accounting between the parties and the corporation as to all the financial matters about which complaint is made, would be an ample and complete remedy and assure, to the complaining parties, all the relief to which they are entitled to make claim. This court also say, in Shack v. McKey, 100 Ill. App. 294, “The power to appoint a receiver and put him in possession of another’s property is one of the most important prerogatives of equity, only to be exercised by the conscientious chancellor where it is clear there is no other adequate means of doing justice between the parties and preventing the accomplishment of a wrong.” High on Receivers, sec. 10; Cook on Corporations, secs. 746-863. As said by Cook, sec. 863: “The court will not injure the whole enterprise to correct a wrong done to the enterprise. Sometimes the court will appoint a receiver of an insolvent corporation at the instance of a stockholder.” Such receiver, however, will in no case be appointed, except where such a course is imperative to protect the assets of an insolvent concern. Here we find the order of appointment in express terms, excluding all the officers from its management, those who have been engaged for years in its prosperous conduct, and the putting into control as receiver a corporation about whose ability successfully to manage and conduct such a corporate enterprise, requiring, as it does, expert technical knowledge, there is no proof and therefore no room for favorable inferences exists. By the terms of the appointing order, the receiver is deprived of the right to avail of the managerial knowledge. It is literally pitched into the brewery, a going concern, to conduct it haphazard, as best it may. Instead of conserving the corporate property by such an order, it would appear to be menaced with disintegration and possibly ultimate ruin. Lemker v. Kalberlah, 105 Ill. App. 445; Ruprecht v. Henrici, 113 Ill. App. 398; Rich v. Mulloney, 121 Ill. App. 503; 10 Cyc., pages 989 and 991. The only instances in which the appointments of receivers have been sanctioned for solvent corporations are those cases where irreconcilable dissensions have arisen between the officers and managing directors, resulting in retarding the corporate enterprise and threatening its existence. To straighten out such complications, to prevent disaster and ruin to the business and the stockholders, receivers have been temporarily appointed to act until the tangle in the corporate affairs could be unraveled and the stockholders given the opportunity, under the direction and the protective order of the court, to elect and install new directors, officers and managers. When this has been accomplished, the receivers have invariably been discharged and the corporate property restored to the control and management of the new regime installed under the protecting supervision of the court. The appointment of the receiver here was improvident, unwarranted and erroneous. Third. That the Ernsts and Furst and Boldenweck acquired their stock holdings rightfully and legally cannot be gainsaid. That when any of them held office in the association they were elected in accordance with the by-laws governing elections, is nowhere disputed. The contentions arise on their conduct as officers and directors of the association. Prior to November 12, 1896, the by-laws of the association provided that no officer should receive a yearly salary in excess of three thousand dollar's. On that day the by-law was amended to read, “The salaries of the officers of the company shall be fixed from time to time by the board of directors.” At a meeting of the directors May 9, 1901, new by-laws were adopted, the one as to salaries being that “The salary of each officer of the company shall be such as may be fixed by the board of directors from time to time at any regular or special' meeting of the board.” The duties and powers of enacting by-laws of a corporation are entrusted by the statute to the directors. The concurrence of the stockholders is not needed, and if procured adds no weight to their validity. Manufacturers Ex. Co. v. Landay, 219 Ill. 168. Salaries were thereafter paid to the president, vice-president and treasurer at the rate of $6,000 per annum until 1901. In November, 1901, the salaries of the president and treasurer were increased to $7,500. Boldenweck, as secretary and in charge of the brewery, assumed the additional duties of brew master in place of an assistant at the salary of $1,800 a year, whose services were then dispensed with, and was paid $4,000 a year. In 1901 the president and vice-president, who also discharged the duties of treasurer, that office having been temporarily made vacant, were voted $10,000 salary. February, 1902, the same salary was voted by the board of directors, viz.: $10,000 each, to the president, vice-president and treasurer, and like action was taken by the directors in January, 1903, March, 1904; and February, 1905; as to official salaries. Henry P. Klein was present and took part at all the foregoing meetings of the directors. By resolution of the directors passed October 14, 1897, in a regular meeting, the executive officers of the association were authorized to purchase such real estate which, in their opinion, might be suitable for saloons and necessary for promoting the sale of the beer of the association. The executive officers did purchase several pieces of such property, as appears from the statement preceding this opinion and the report made by the president to the stockholders hereafter noted. A special meeting of the stockholders was held November 28, 1905, at which Henry P. Klein was present and took an active part. Four thousand, six hundred and seventy-two shares of the 5,000 shares of capital stock were represented and voted at this meeting. Leo Ernst, the president, made a statement of all the business of the company since 1896, being the time from which his connection with the association dated, and also reported that under the resolution of October 14, 1897, about twelve pieces of property, together with some small lots, had been acquired by the association at a total cost of $245,000. At this meeting Henry P. Klein and others spoke in criticism of the action of the executive officers in making the purchases of real estate reported. Thereupon the following resolution was offered: “We the stockholders of the Independent Brewing Association, in Stockholders’ special meeting assembled, at the office of the Association in Chicago, on the 28th day of November, 1905, 4672 shares of stock being represented at this meeting, having heard the detailed report of President Leo Ernst, of the purchase of real estate made by the Association since the year 1896, for the purpose of its business, and to sell its beer at retail, and for distributing stations, do hereby ratify, approve and confirm all such purchases of real estate heretofore made by the board of directors, the titles to which are now in the Independent Brewing Association. ’ ’ This resolution was carried by a vote of 3,287 shares against 1,385 shares, being a clear majority of all the shares voting’ of 902. Klein voted with the minority. Thereupon another resolution was offered and adopted by a majority vote of 2,222 shares of stock, Klein again voting, his stock in the negative. Said resolution reads: “Whereas, the Independent Brewing Association has purchased various parcels of real estate for the purpose of its business; and “Whereas, it is desirable that the Board of Directors shall have the power to sell any of said parcels of real estate which are not a part of the brewery plant, if, in their judgment, it would be for the best interests of this corporation to sell the same; “Now, therefore, we, the stockholders of the Independent Brewing Ass’n in stockholders’ special meeting assembled, called pursuant to the by-laws, do hereby authorize and empower the Board of Directors to sell all the various parcels of real estate not a part of the brewery plant, purchased by this Company, or any of said parcels of real estate, as in their judgment they may deem best for the interests of the Company, including in such sale the good will, as beer stands, of said corporation, and each of them.” At the annual meeting of the stockholders held January 17, 1906, while this suit was pending, all of the capital stock, saving only 36 shares, being represented in person or by proxy, the minutes of the special stockholders ’ meeting were read and approved. The annual statement was read and approved. A resolution authorizing a sale of the association real estate, except the brewery plant, was passed, substantially in the words of the resolution voted at the special meeting of November 28, 1905. The five directors elected consisted of the three Ernsts, Henry P. Klein and P. Jmnmel. They were the unanimous choice of the stockholders, and on due motion made, Henry P. Klein cast one ballot for all the shares present or represented. Klein in his testimony admits that he was aware of the resolution of October 14, 1897, in relation to the association’s acquiring real estate for beer stands, although he disclaims having knowledge of its extent, yet he voted for the resolution and never, for aught the record discloses to the contrary, made any protest or criticism until the special meeting of the stockholders November 28, 1905, a period of time extending over eight years. Klein did not occupy the relation to the association of a minority stockholder. He was a director and as such not only chargeable with knowledge of what was in fact being done by the official management, but the proof in the record, unchallenged, demonstrates that he had actual knowledge of all the transactions which he is here disputing at the several times when they transpired, and that he voted for most of them in directors’ meetings, and that some of them were projected upon his initiative action. Salaries were voted and the purchase of six pieces of real estate and the $125,-000 mortgage put upon the association plant and property by resolutions of the directors at meetings which he attended, and at which he voted. He lent verity to the actions of the special stockholders’ meeting of November 28, 1905, by voting for the approval of the minutes of that meeting, which contained the resolutions in relation to the association’s acquired real estate, at the annual meeting of January 17, 1906, and in voting in favor of a resolution authorizing a sale of that real estate by the executive officers of the association. During all of this time Klein received a yearly salary of $300 as a director, and was as intimately informed as to the working and operation of the brewery as any officer of the association. He cannot screen himself behind a shadowy claim of ignorance, when actual knowledge is proven, and, however, were it lacking, his relationship to the association imposed upon him the duty of keeping himself informed, and the law will impute to him such knowledge, and bar him from being heard to the contrary. Junimel, the bookkeeper, swears that statements were not only furnished Klein, but that the books were always open for his inspection as to any detail about which he might wish information. There is no evidence in this record that any artifice was used or any obstacle placed in the way of Klein, preventing or even discouraging him from freely informing himself about the business and dealings of the association, the channels to which information were always open and accessible to him. The purchases by the officers of real estate were upon full information touching such purchases, ratified by the stockholders at their meeting held November 28, 1905, and Klein, after being fully heard in opposition, is also concluded by such ratification. He is further estopped by his laches and assumed acquiescence flowing from his failing to protest or complain for more than eight years. The argument that these dealings in real estate were secret and withheld from Klein, is futile in the light of the undisputed facts. The real estate purchases were not ultra vires. They were in furtherance of the business authorized by the charter of the association, and, in the view of the directors, necessary to its prosperity. Kraft v. West Side Brewery Co., 219 Ill. 205, is to this effect; also Central Lumber Co. v. Kelter, 201 Ill. 503. It is urged that the transactions characterized as illegal were brought about by the vote of dummies acting in the interests of the Ernsts, and Adams v. Burke. 102 Ill. App. 148, affirmed in 201 Ill. 395, is cited as a parallel sustaining cause. But the cases are diametrically at variance. In the Adams case the directors controlled by the major stockholder held but one share of stock each, and their vote was always at the bidding of the majority stockholder. But Klein 'himself was a large stockholder, acting for himself and in his own interest, and his vote made possible the accomplishment of the major part of the transactions now complained about, and the other directors were also substantially interested and uncontrolled. S. S. of O. of I. Hall v. Baker, 134 Ind. 293, is not at all relevant. There the court founded its interference to “wrest the management and property of the corporation from the hands of designing, wicked, incompetent and irresponsible officers in charge of its affairs, who are squandering and converting the funds and refusing an accounting by such officers, and placing the property and management of the affairs of the corporation in the hands of a receiver, holding it in abeyance until the management is changed.” Surely it cannot be urged in any serious manner that any proof here justifies even an inférence or suspicion that the Ernsts at any time did anything which falls within the characterizations quoted. They are neither designing or wicked, incompetent or irresponsible, and so far from refusing an accounting, made a very comprehensive and understandable one to the stockholders. They have never refused any information requested, or shut the books to the view of any stockholder desiring to examine them. It is said that the resolution did not authorize purchases of real estate from the Ernsts. This is patent from a reading of the resolution. The inquiry therefore becomes pertinent as to whether the conveyances are void or merely voidable, and if the latter, then whether the doctrine of estoppel or laches can be invoked, becomes important, and likewise whether Klein, with knowledge of- the facts, imputable or actual, ratified the transactions. Was the fraud, if any, actual or constructive? What we have already said as to Klein as a salaried director being chargeable with knowledge of all the association business, is equally applicable to the real estate transactions, as to which we think the proof sufficiently certain to justify the conclusion that he had actual knowledge on this subject, also. The evidence in the record in relation to values shows that those at which the real estate was taken from the Ernsts by the association were not so exorbitant or excessive that a fraudulent intent is inferrable thereform. The transactions as to the real estate bought from the Ernsts were undoubtedly voidable at the election of the association because of their fiduciary relationship to the association, but it also had the power to ratify these voidable transactions. At the instance of a creditor transactions of this character will be very closely scanned, and if there is found to be fraud sufficiently flagrant working to the financial detriment of such creditor, the transactions will be avoided and restitution compelled. A transaction between an officer of a corporation and the corporation, which is not fraudulent, may be ratified by the stockholders, notwithstanding the directors may have been disqualified from authorizing it on account of their individual interest. Kobertson v. Buclden, supra. While it would appear that counting the stock owned by Conrad Furst, the resolution ratifying the real estate transactions in which the Ernsts, or either of them, were vendors, could have been carried without the vote of the Ernsts’ shares, yet yit is the rule that the Ernst stock could be counted for the resolution, even had it been necessary to do so to carry it., 1 Marowitz on Corporations, sec. 474; 2 Cook on Corporations, sec. 662; Hart v. Ogdensburg Ry. Co., 89 Hun, 316. And whether such ratification was before or after bill filed by a stockholder is unimportant. Majorities rule in corporation matters, and every stockholder holds his shares subject to its recognition. A bill will be dismissed where, after its filing, the matters in controversy have been ratified in a stockholders’ meeting held subsequent to the filing of the bill. Foss v. Harboute, 2 Hare 461; Nye v. Storer, 168 Mass. 53. There was no actual fraud in the real estate transactions in dispute. But for the action of the stockholders they were voidable. Their ratification by the stockholders is binding upon them all, including Klein, and the transactions are now immune from attack by-, them. Henry P. Klein having participated in the fixing of the officers’ salaries, now sought to be impeached under the authority of Brown v. DeYoung, 167 Ill. 349, he is estopped from any participation in salaries so paid, which he either expressly or impliedly joined in authorizing. No other stockholders are here complaining. While other stockholders are here by intervening petition, and as they offered no proof, the case stands alone on the pleadings and proof of appellants and Klein. As appears from recitations already made, Klein has affirmatively acquiesced in the salary allowances which he now insists are unlawful excess payments, and of which he is here seeking to compel an account. The same salaries, now objected to, were voted on his motion in the 1905 meeting, the last one at which salaries were fixed prior to the commencement of this proceeding. He retained his own salary, which finds-no warrant in the by-laws, and by so doing he may be said to have added ratification to acquiescence. Furthermore, there is no evidence that the salaries paid were excessive, but, on the contrary, it appears that Leo Ernst, before his connection with the brewing association, was paid an annual salary of $14,000 by the United States Brewing Company, to which he held a similar relation and performed like service. Boldenweck was an experienced man and evidently was entitled to the increase given him when he assumed and discharged the additional duties or brew master. The payment of the unearned salary to Otto Ernst on his retirement as treasurer and director was, to say the least, of doubtful propriety, but however that may be, Klein was present at the meeting at which this questionable transaction was ordered, and made no protest and took no action for years thereafter disputing the integrity of such conduct. Laches is imputable to him. His silence must be construed as assent, and whether legal or not, he is estopped from now contesting what was then done and afterwards parried out with his full knowledge. When it is considered that Klein, a director, and fully advised at all times of the condition of the association, its business and finances, having superior knowledge of its workings in all its departments, and in constant intercourse with the officers, could have honestly believed frauds were being perpetrated by the management to its injury,' when he increased his stock holdings from 370 shares in 1901, to 1,073 shares, which he possessed when he started this litigation, and could have so believed when he offered his stock to the. Ernsts at $165 per share just before filing this bill, surely this may be_ regarded as cogent evidence of his satisfaction with the management of the business and the profit it was returning to its stockholders. These purchases may be held to work a ratification of the methods pursued in the conduct of its business by its officers. The ..Ernsts borrowed money from the brewery and so did Klein. The evidence shows that the Ernsts paid back all the principal of the loans and some interest, how much does not appear. The burden certainly rested upon Klein to substantiate his charge in relation to interest, and as he made no attempt to do so, his complaint is unavailing. F. W. Boldenweck became a bankrupt. Whatever money he borrowed from the association and did not repay is on a par with the borrowing by the Ernsts and Klein. The Ernsts are no more liable for Boldenweck’s indebtedness than Klein would be for the Ernsts if they had not paid. The sums were all loaned with the knowledge and implied assent of Klein, and upon principles herein laid down he is estopped to dispute the transaction. Dividends were paid, and in the whole course of the conduct of the business of the brewery it has made fair and remunerative returns in the shape of regular and substantial dividends to its stockholders, and none of its earnings have been improperly withheld. 'While annual dividends were less than ten per cent, on the capital stock, still the book value of the stock has been increased half a million of dollars by betterments and additions, real estate, etc., all made and acquired with the earnings of the association. On the showing made by the proofs there has been a net increase from dividends and investments netting twelve per cent, on the' face value of the half million dollars of capital stock,—surely no evidence of prodigality or waste. No relief was requested or decreed against Conrad Furst. Why appellees insisted on retaining him as a party does not appear. The chancellor should, after the hearing, have dismissed him out of the case. There is neither proof nor contention that any of the appellees have equities superior to Klein’s, or that they in any way stand on any different footing. Neither is it urged that Klein failing, they then have any standing for relief. Appellee Frederick having voted in favor of the ratification resolutions at the stockholders’ meeting November 28, 1905, is precluded from obtaining relief. Neith bought Ms stock pendente lite and took it cum onere. May and Bohn each own five shares of stock and took no part in the November stockholders’ meeting of ratification. Without passing upon the integrity of all the actions of appellants here challenged, or deciding they are invulnerable against attack, it is sufficient to say, for reasons already given, that the door to an accounting or other relief is closed against Klein. For the reasons indicated the decree of the Superior Court is reversed, and the cause remanded, with directions to dismiss the bill for want of equity as to all the complainants except Bohn and May, and as to Bohn and May the bill will be dismissed without prejudice to their rights, if any they have. Reversed and remanded with directions.