Baker v. Allen

• Court: United States State Supreme Judicial Court of Massachusetts
• Citation: 292 Mass. 169,197 N.E. 521
• Parties: BAKER et al. v. ALLEN et al.
• Decision Date: 23 September 1935

292 Mass. 169

197 N.E. 521

BAKER et al. v. ALLEN et al.

Supreme Judicial Court of Massachusetts, Suffolk.

September 23, 1935

Suit in equity by William L. Baker and others against William R Allen and others wherein the National Boston-Montana Mines Company intervened. From a final decree dismissing the bill plaintiffs appeal.

Reversed.

Appeal from Supreme Judicial Court, Suffolk County.

G. H Lucey, F. W. Campbell and A. L. Mekelburg, all of Boston, for plaintiffs.

J. P. Wright and R. G. Wellings, both of Boston, for defendants Keniston and others.

D. M. Hill and D. M. Hill, Jr., both of Boston, for defendants Allen and others.

J. W. Murdock, of Brockton, and F. D. Nichols, of Boston, for defendant National Montana Mines Co.

RUGG Chief Justice.

This is a suit by minority stockholders of the Boston-Montana Mines Company (hereafter called the corporation), a business corporation organized under the laws of Montana and having a usual place of business at Boston within this Commonwealth, in behalf of themselves and other stockholders who may become parties, for the benefit of the corporation, against its directors, to recover for damages sustained by the corporation in consequence of breaches of their fiduciary duties by the directors. The corporation and its two subsidiaries are joined as defendants. The directors are charged by the allegations of the bill with causing damage to the corporation by culpable neglect, by mismanagement of its business and failure to exercise ordinary intelligence in carrying it on, by failure to safeguard its rights, by wasting corporate assets, by illegal and ultra vires issues of capital stock, by permitting payment of excessive salaries to three defendants, by the payment of money under the guise of expenses when such expenses were not incurred or not properly incurred, by issuing false and misleading reports as to the condition of the corporation, by neglecting to make fair reports of the condition of the corporation, by disbursing money without proper vouchers, by refusing to allow the plaintiffs to examine the list of stockholders and the books of account and records until compelled to do so by proceedings in mandamus, by permitting the defendant Allen as president to handle the monies of the corporation as if they were his own, to deposit them in his own name and to use them for his own purposes, and by subjecting the real estate of the corporation and its subsidiaries to loss and peril of complete loss by failure to provide for the payment of taxes. These allegations are summarized in paragraph 23 of the bill, with respect to the directors, as ‘ their failure to perform and their dereliction in performance of their fiduciary duties' as directors of the corporation. There are allegations as to the necessity for stockholders to institute the suit.

The bill was filed October 7, 1932. The defendants on October 19, 1933, were permitted to file an amendment to their answer previously filed. This amendment was in effect a plea setting up that, after consideration of a plan outlining the financial difficulties of the corporation and means for solving them, pursuant to appropriate votes duly adopted by its directors on November 9, 1932, and by its stockholders on November 30, 1932, the corporation on June 1, 1933, by deeds and instruments of transfer duly executed, sold and conveyed to the National Boston Montana Mines Company, a corporation organized under the laws of Montana, ‘ all and singular the real, personal and mixed property of the defendant Boston-Montana Mines Company,’ and that thereby the cause of action set forth in the plaintiffs' bill ‘ has now vested in the National Boston Montana Mines Company,’ and that the latter corporation or its officers and stockholders alone have the right further to prosecute that suit. That corporation was permitted to intervene and to file an answer.

This amendment rightly was allowed. Twombly v. Selectmen of Billerica, 262 Mass. 214, 216, 159 N.E. 630. There was set up in it matter in the nature of and proper for a plea. Eastman Marble Co. v. Vermont Marble Co., 236 Mass. 138, 148, 128 N.E. 177; Berenson v. French, 262 Mass. 247, 255, 159 N.E. 909; Reilly v. Selectmen of Blackstone, 266 Mass. 503, 507, 165 N.E. 660. The case was then referred to a master to hear the evidence and to determine the facts raised in the amendment to the answer, leaving the matter of liability under the bill to be determined after the disposition of the issues raised by the amendment to the answer.

The master, as shown by his report, found that the allegations of fact set forth in the amendment to the answer were established. He found, also, that the by-laws of the corporation in conformity to the laws of Montana provided that the directors should have the power to vote to transfer all the assets of the corporation. He found that the stockholders voted in favor of such transfer. The conveyance by the corporation to the National Boston Montana Mines Company (hereafter called the new corporation) described the various properties in great detail but did not purport to convey by description or reference any rights which the corporation may have had in the present litigation, but did convey ‘ all and singular the real, personal and mixed property of Boston-Montana Mines Company, including particularly and without restricting the generality of the foregoing, the following described property, namely:’ An interlocutory decree from which no appeal was taken confirmed the master's report. The facts stated therein must be accepted as true.

The single justice found the amended answer in the nature of a plea in bar and the facts as set forth in the master's report good and sufficient and ordered that a final decree be entered dismissing the bill. From such final decree the plaintiffs appealed.

Both the corporation and the new corporation are alleged to be organized under the laws of Montana. Our attention has not been drawn to any provisions of the law of that state governing the facts here disclosed. The case must be decided, therefore, according to the general principles of law as administered in this jurisdiction. O'Brien v. O'Brien, 246 Mass. 411, 420, 141 N.E. 236; Calnan v. Guaranty Security Corp., 271 Mass. 533, 543, 171 N.E. 830.

A suit in equity by minority stockholders in a representative capacity against directors for wrongs committed by them against the corporation is not in vindication of any personal rights. Such wrongs are adverse to the corporation and except through that have no relation to the stockholders. The interests of the corporation alone are immediately concerned. Damages must be paid to it if any are recovered. Bartlett v. New York, New Haven & Hartford Railroad Co., 221 Mass. 530, 531, 109 N.E. 452; Hayden v. Perfection Cooler Co., 227 Mass. 589, 590, 591, 116 N.E. 871; Beaudette v. Graham, 267 Mass. 7, 11, 12, 165 N.E 671; Sagalyn v. Meekins, Packard & Wheat, Inc. (Mass.) 195 N.E. 769. Directors of a business corporation are fiduciaries bound to the strictest good faith in managing its property. Their paramount duty is to the corporation, to which their personal interests are subordinate. They are required to act with reasonable intelligence although not responsible for mere errors of judgment or want of prudence. Brown v. Little, Brown & Co., Inc., 269 Mass. 102, 117, 168 N.E. 521, 66 A.L.R. 1284; Beaudette v. Graham, 267 Mass. 7, 12, 165 N.E. 671; Stratis v. Andreson, 254 Mass. 536, 150 N.E. 832, 44 A.L.R. 567; Goodwin v. Agassiz, 283 Mass. 358, 186 N.E. 659; Albert E. Touchet, Inc., v. Touchet, 264 Mass. 499, 507, 163 N.E. 184; Elliott v. Baker, 194 Mass. 518, 523, 80 N.E. 450. Conduct on the part of directors amounting to fraud or breach of fiduciary duty and resulting in impairment of assets or loss of property of the corporation or in profit to themselves, renders the offending directors liable to make full restitution. Manning v. Campbell, 264 Mass. 386, 390, 162 N.E. 770; L. E. Fosgate Co. v. Boston Market Terminal Co., 275 Mass. 99, 107, 175 N.E. 86. A cause of action of this nature survives against the estate of the director who has thus proved faithless to his trust. Warren v. Para Rubber Shoe Co., 166 Mass. 97, 104, 44 N.E. 112; Wineburgh v. United States Steam & Street Railway Advertising Co., 173 Mass. 60, 53 N.E. 145,73 Am.St.Rep. 261;...