Russell v. Henry C. Patterson Co.

• Decision Date: 23 May 1911
• Docket Number: 48
• Citation: 81 A. 136,232 Pa. 113
• Parties: Russell v. Henry C. Patterson Company
• Court: Pennsylvania Supreme Court

81 A. 136

232 Pa. 113

Russell v. Henry C. Patterson Company

No. 48

Supreme Court of Pennsylvania

May 23, 1911

Argued March 23, 1911

Appeal, No. 48, Jan. T., 1911, by Edwin H. Coane, C. Conde Freas and Bertram L. Kimball, from decree of C.P. No. 1 Phila. Co., Dec. T., 1909, No. 2,713, on bill in equity in case of Henry A. Russell v. Henry C. Patterson Company and Edwin H. Coane et al. Reversed.

Bill in equity for an injunction. Before MAGILL, J.

The facts are stated in the opinion of the Supreme Court.

The court entered the following decree:

That the said Henry C. Patterson Company and its officers and directors and the said Edwin H. Coane, C. Conde Freas and Bertram L. Kimball, defendants, are hereby perpetually restrained from carrying into effect the motion of February 9, 1909, set forth in the plaintiff's bill filed in this case and from paying to the said Edwin H. Coane and C. Conde Freas the salaries mentioned in said motion or any part thereof in excess of $1,200 per annum which they the said Edwin H. Coane and C. Conde Freas were receiving at the time of said motion, to wit, February 9, 1909.

That the said Edwin H. Coane and C. Conde Freas are hereby ordered and directed to return into the treasury of the said Henry C Patterson Company such sums as they may have received as salaries in excess of the rate of $1,200 per annum on or subsequent to February 1, 1909.

That the defendants, Edwin H. Coane, C. Conde Freas and Bertram L. Kimball, shall pay the cost of this suit.

Error assigned among others was the decree of the court.

For the reasons stated, the decree of the court below is reversed and the bill is dismissed at the cost of the appellee.

Horace Haverstick and Frank P. Pritchard, for appellants. -- The action of the directors was only voidable and capable of being ratified: Schaffhauser v. Brewing Co., 218 Pa. 298; Bagaley v. Iron Co., 146 Pa. 478; U.S. Steel Corporation v. Hodge, 64 N.J. Eq. 807 (54 A. Repr. 1); Camden Land Co. v. Lewis, 101 Maine, 78 (63 A. Repr. 523).

The error of the learned court below consisted in overlooking and disregarding the vital distinction between the votes of these men in the board of directors acting as directors and fiduciaries, and the votes of the same men as stockholders in the stockholders' meeting, where each acts and votes as his own interests and inclinations dictate, regardless of the others, even if his vote favors himself: U.S. Steel Corporation v. Hodge, 64 N.J. Eq. 807 (54 A. Repr. 1); Nye v. Stoner, 168 Mass. 53 (46 N.E. Repr. 402); Green v. Felton, 84 N.E. Repr. 166; Twin-Lick Oil Co. v. Marbury, 91 U.S. 587; Pneumatic Gas Co. v. Berry, 113 U.S. 322 (5 S.Ct. Repr. 525).

G. Von Phul Jones, for appellee. -- The resolution was not made valid by the votes of the officers at the stockholders' meeting: Beatty v. North-West Transportation Co., 12 Canada Supreme Ct. 598.

The stockholders had no power to ratify: Schaffhauser v. Brewing Co., 218 Pa. 298; Bergdoll v. Bergdoll Brewing Co., 10 Pa. Dist. Rep. 173.

The resolution also violates the rule that a corporation cannot pass a resolution to make salaries effective as of a past date. It was passed on February 9, 1909, and read that it was to take effect as of February 1, 1909: Loan Assn. v. Stonemetz, 29 Pa. 534.

Before BROWN, MESTREZAT, POTTER, ELKIN and STEWART, JJ.

OPINION

MR. JUSTICE MESTREZAT:

The Henry C. Patterson Company was incorporated January 20, 1904, under the laws of Pennsylvania, and is engaged in the lumber business. It has a capital stock of $50,000, divided into 500 shares of the par value of $100 each. From September 1, 1908, to the date of the hearing by the court below, the stock was held as follows: Edwin H. Coane, 348 shares; C. Conde Freas, one share; Bertram L. Kimball, one share; and Henry A. Russell, 150 shares. The by-laws fixed the number of directors at four and the board is composed of the plaintiff and the three defendants. At the annual meeting of the stockholders, held February 9, 1909, Coane, Freas, Kimball and Russell were re-elected directors for the ensuing year, and at a meeting of the board of directors held on the same day Coane was re-elected president, Kimball vice president, and Freas, secretary and treasurer. Article 3, sec. 4, of the by-laws of the corporation provides as follows: "The board of directors shall have charge of the general conduct of the business affairs of the company, and establish such rules and regulations, and from time to time alter or amend the same, as in their opinion are expedient to the welfare of the company. They shall, from time to time, fix the compensation of the officers." At the time of the election of the officers in February, 1909, the salary of the president and of the secretary and treasurer was $1,200 each per annum, said amounts having been fixed at a meeting of the board of directors in July, 1908, when they were reduced from $1,500. At a meeting of the board on February 9, 1909, after the election of the officers, a motion was made to fix the salary of the president and of the secretary and treasurer at $2,000 per year for each, dating from February 1, 1909. Coane, Freas, and Kimball voted for the motion and Russell against it. These salaries have been paid to the officials in accordance with the resolution. From the organization of the company until July, 1908, Russell acted as vice president of the company and was actively engaged in the conduct of the business. In the early part of his employment, he received a salary, as vice president, of $2,500 per year; Freas, as secretary and treasurer, and Charles G. Miller, Russell's brother-in-law who was acting as general manager, each received the same, and Coane as president in lieu of a fixed salary the profit on one branch of the company's business amounting to about $1,500 per year, the total salaries of the four persons being $9,000 a year. Owing to certain losses and changes in the location of the company's business the salaries were reduced to $1,500 per year and thereafter to $1,200 per year. Then Russell notified the officers of the company that he would no longer continue to render services to the company and Miller withdrew from the company. Coane, as president, thereafter devoted much more of his time to the business of the company and at the time of the hearing in the case was devoting practically all of his time to its general business. Freas at all times devoted the whole of his time and attention to the company's business. The work of the company which had formerly been done by the four stockholders and Miller is now done by Coane, Freas, and a clerk whose salary is $1,300 per year.

At the annual meeting of the stockholders of the company, held February 8, 1910, which was their first meeting held after the resolution of the board of directors adopted February 9, 1909, increasing the salaries, a resolution was passed ratifying and confirming the action of the board of directors fixing the salaries of the president and of the secretary and treasurer each at $2,000 per year. Coane, Kimball, and Freas voted for the resolution and Russell against it.

On January 10, 1909, Russell filed this bill to restrain the officers of the company from further paying the salaries, and to compel Coane and Freas to return into the treasury of the company the excess of salaries above $1,200 per annum. The bill averred, inter alia, that the salaries were exorbitant, unreasonable and unfair, and that the increase was illegal because it could not have been made without the votes of Coane and Freas, the incumbents of the offices. The learned judge held that the resolution of the board of directors increasing the salaries was void, and that the resolution adopted by the stockholders ratifying and affirming the resolution of the board was also void and of no effect, and entered a decree restraining the officers and directors of the company from carrying into effect the motion of February 9, 1909, increasing the salaries of Coane and Freas, and directing them to return to the treasury of the company such sums as they had received as salaries in excess of $1,200 per year. The defendants, Coane, Freas, and Kimball have appealed.

The defendants requested the court to find that the "increase of salaries was reasonable and a just compensation for the services rendered." The court declined to affirm the point in the form in which it was submitted. The learned judge, however, in answering the point said: "The amount of the salaries of Coane and Freas as increased to $2,000 per annum each is probably not more than reasonable compensation for the services rendered particularly in the case of Coane who appears to have devoted much more of his time to the work of the company after the withdrawal of the plaintiff from an active part in the management of its affairs, and it probably would have cost the company quite as much to employ other persons to perform that part of the labor now done by Coane and Freas, which does not strictly pertain to their duties as officers." He then gives as a reason for not unqualifiedly affirming the point that as stockholders Coane and Freas were interested in making their stock more valuable; and that if they did not desire to perform the manual labor then performed by them they, as officers and directors, could employ others to do the work, and that the plaintiff could not and probably would not complain. This reason for not affirming the point after having found the facts above stated we do not regard as tenable. The learned judge was simply requested to find whether the compensation voted by the directors as salaries was reasonable and just, and not whether the directors should have employed others to perform the services. The directors had...