Lydia E. Pinkham Med. Co. v. Gove

• Decision Date: 08 July 1937
• Parties: LYDIA E. PINKHAM MEDICINE CO. v. GOVE et al.
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

298 Mass. 53

9 N.E.2d 573

LYDIA E. PINKHAM MEDICINE CO.

v.GOVE et al.

Supreme Judicial Court of Massachusetts, Essex.

July 8, 1937.

Suit in equity in the Supreme Judicial Court by the Lydia E. Pinkham Medicine Company against Aroline P. Gove and others, wherein questions pertaining to a master's report and of the question of the final decree to be entered were reserved and reported without decision. From interlocutory decrees in favor of plaintiff, defendants appeal.

Decree in accordance with opinion.Appeal from Supreme Judicial Court, Essex County; Crosby, Judge.

J. W. Worthen and E. B. Cook, both of Boston, for plaintiff.

J. C. Reilly, T. Hunt, and F. T. Hammond, Jr., all of Boston, for defendants.

QUA, Justice.

The plaintiff is a Maine corporation having its principal place of business at Lynn in this commonwealth. The principal defendants are the treasurer and assistant treasurer of the corporation, who are also directors, and who are residents of this commonwealth.

The main allegations of the bill in condensed form are these: The stock of the corporation is divided equally into two classes, the ‘Pinkham stock,’ owned by members of the Pinkham family and the ‘Gove stock,’ owned by members of the Gove family. The by-laws provide that the president and a vice president shall be elected by the holders of Pinkham stock and the treasurer and assistant treasurer by holders of Gove stock; that three of the six directors shall be elected by the holders of Pinkham stock and three by holders of Gove stock; that no vote of the stockholders, except for election of a director, shall be valid unless voted by holders of a majority of each class and that no action of the directors, unless unanimous, shall be valid if vetoed by notice filed within ten days by the holders of a majority of the shares of either class. In 1925 the defendants Aroline P. Gove and Lydia P. Gove, who previously took no active part in the conduct of the business, began efforts to gain exclusive control in wilful disregard of the by-laws and of long established practice, and violent dissensions ensued between them and the Pinkham directors with respect to the conduct of the business in all departments. The defendants Aroline P. Gove and Lydia P. Gove have lent to the plaintiff at various times beginning in 1933 large sums of money at five per cent interest, and as treasurer and assistant treasurer of the corporation, in order to enrich themselves at the corporation's expense, they have refused to repay these loans or to reduce the interest, although the plaintiff had securities which could have been made available for such payment and although, as the defendants well knew, the plaintiff could have borrowed the money elsewhere, paying interest at a small fraction of five per cent, and although in 1935 the net cash income not needed in the business was alone sufficient to pay these loans in full. Instead of repaying the loans to themselves these defendants, in violation of the by-laws, invested over a quarter of a million dollars of the corporation's 1935 income in bonds yielding interest at a rate much lower than five per cent. In violation of the by-laws, they have issued to themselves the corporation's demand notes for these loans, bearing five per cent interest. The bill then describes at length a controversy which has arisen between the defendants Aroline P. Gove and Lydia P. Gove on one side and the president and the Pinkham directors on the other side as to the kind and amount of advertising to be done by the corporation, in connection with which it is averred that the defendants Gove have spent monies of the corporation wrongfully and in violation of the by-laws, and without the knowledge or consent of the board of directors, have paid wages to employees after the employees have been discharged, have sent out unauthorized contracts for advertising, have refused to pay for advertising not personally approved by them, and have interfered in various ways set forth to prevent the carrying out of a contract for advertising lawfully made by the corporation with an advertising agency. It is alleged that by the course of conduct hereinbefore described the defendants have deliberately and maliciously obstructed the conduct of the business and damaged its good will by assuming or attempting to assume powers not vested in them and by exercising without regard to the welfare of the corporation such powers as have been given to them. Said defendants are conspiring to disrupt the organization of the business and to destroy its discipline, morale and efficiency, they have refused to attend any meetings of the directors, have induced the third Gove director also not to attend, and have maliciously and unjustifiably prevented the procuring of quorums at meetings. Their conduct has been actuated throughout by prejudices and animosities ‘in a deliberate refusal to discharge their duties as directors or officers with judgment and discretion, or to permit any meeting of the Directors for such purposes.’ It is further averred that, for the purpose of forcing Pinkham stockholders to sell their stock below its fair value, the defendants Gove have kept the books improperly and have made wrongful and improper entries in order to make the net surplus appear less than $1,000,000, so as to evade a by-law provision requiring payment of dividends.

We need not recite in detail numerous further specific allegations of unauthorized and wrongful acts on the part of the defendants Gove. At the end of the bill it is asserted that these defendants by their conduct intend to benefit themselves at the expense of the plaintiff and of other stockholders and to hamper and prevent the conduct of the business by the board of directorsand by the duly constituted officers, and to prevent any effective participation of the Pinkham directors in the conduct of the business and any further payment of dividends, all for the express purpose of forcing the Pinkham stockholders to sell their stock to the defendants Gove at prices having no relating to fair value.

A subsequent amendment to the bill alleges that since this suit was brought the defendants Gove caused a suit to be brought in the State of Maine for the appointment of a temporary and permanent receiver for the plaintiff in this suit; that the proceedings in Maine were not brought in good faith, but were brought as a means of combatting the present suit and of harassing the plaintiff and are vexatious in character. Upon this amendment the defendants Aroline P. Gove and Lydia P. Gove were enjoined from prosecuting the suit in Maine until further order of this court.

1. There was no error in overruling the defendants' demurrer. That demurrer was directed against the bill as a whole and not against any particular part thereof. It must fail if the bill states a proper cause of action on any ground. Carleton & Hovey Co. v. Burns, 285 Mass. 479, 484, 189 N.E. 612. No discussion is needed to show that the bill does contain statements of breaches of the fiduciary obligations of the defendants Aroline P. Gove and Lydia P. Gove as directors and officers of the plaintiff, causing injury to the plaintiff and threatening further injury, and therefore proper subjects of a suit in equity by the corporation. Elliott v. Baker, 194 Mass. 518, 523, 80 N.E. 450; Manning v. Campbell, 264 Mass. 386, 389, 162 N.E. 770;Baker v. Allen (Mass.) 197 N.E. 521;Spiegal v. Beacon Participations, Inc. (Mass.) 8 N.E.(2d) 895, and cases cited. The bill distinctly charges that the defendants Gove in their capacity as officers of the corporation have knowingly and purposely acted adversely to its interests from motives of personal gain and malice. These are charges of bad faith and breach of trust. Spiegel v. Beacon Participations, Inc., supra (Mass.) 8 N.E.(2d) 895, at page 907.

The bill purports on its face to be brought by the corporation named therein as plaintiff. It is signed in the name of the corporation by Arthur W. Pinkham, described as president. It was not necessary in order to escape a demurrer to include express allegations of the authority of the president to bring the suit.

The suit does not, in our opinion, so far involve the internal affairs of a foreign corporation that it ought not to be heard in the courts of this Commonwealth. Although in legal theory the plaintiff is a resident of Maine, its principal place of business is alleged to be in this Commonwealth. All of the defendants are alleged to be residents of this Commonwealth. It is reasonably inferable from the bill that the acts complained of were performed in this Commonwealth and that the evidence, both documentary and oral, relating to them would be more readily available here than elsewhere. For the most part the bill relates to specific wrongs alleged to have been committed by the defendants against the plaintiff for which relief is sought in the ordinary way by injunction and by a decree for damages. No receivership or winding up of the corporation's business is asked for, and none is necessary to accomplish the objects of the bill. Internal affairs of the corporation are involved to some extent, but they are involved more collaterally than directly. They do not seem to us to depend to any considerable degree upon peculiarities of local law. They can be so dealt with as to cause no embrrassment in the event of subsequent litigation in Maine. It is not plain how any suit brought in Maine could result in adequate relief with respect to the subject matters of this bill, even if a receiver should be appointed there. Personal service upon the defendants is necessary for full relief. They live here. It may be that, as the defendants suggest, no final solution of the difficulties of the plaintiff arising from the disagreements between the Pinkhams and the Goves will be found otherwise than through dissolution and liquidation, which can be accomplished only in Maine. But it is...