Bates St. Shirt Co. v. Waite

• Citation: 156 A. 293
• Court: Supreme Judicial Court of Maine (US)
• Decision Date: 15 September 1931
• Parties: BATES STREET SHIRT CO. v. WAITE et al.

156 A. 293

BATES STREET SHIRT CO.

v. WAITE et al.

Supreme Judicial Court of Maine.

Sept. 15, 1931.

This is so, since acquiescence with full knowledge of facts is equivalent to ratification, and in such a case acquiescence may be assumed or cash surrender value from president and president's wife, because, upon corporation's deciding to abandon policy, president's wife was made beneficiary and continued policy in force.

This was so, since the premiums paid by the corporation secured it the protection which it desired during the time it was beneficiary, and the record not disclosing that the corporation's interest in the policy was other than that of a mere beneficiary, it had no rights to the cash surrender value, which belonged to the insured, so that, while the president's wife was benefited by the change of beneficiary, the corporation was not damaged thereby.

This was so, notwithstanding the fact that, had the president died during the period in which the wife was the beneficiary, the corporation could have recovered from his wife the premiums so paid, because the wife was not benefited nor the corporation injured by reason of the temporary change, since the corporation having the proprietary interest in the policy, was reimbursed for the premiums paid by it in the increased cash surrender value of the policy.

Facts were that during the period in which the dividends in question were declared there was at all times, after proper adjustments were made, a balance of earned surplus sufficient to warrant payments, and that the propriety of paying them was recognized by the management and the preferred stockholders themselves, who, by formal vote, continued to pay them through the following year.

Report from Supreme Judicial Court, Androscoggin County, in Equity.

Bill by the Bates Street Shirt Company against Parker R. Waite and another. On report.

Bill dismissed.

Argued before PATTANGALL, C. J., and DUNN, STURGIS, BARNES, and FARRINGTON, JJ.

George C. Webber, of Auburn, and Bradley, Linnell & Jones, of Portland, for plaintiff.

W. B. & H. N. Skelton, of Lewiston, for defendants.

PATTANGALL, C. J.

On report. Bill in equity brought to recover from former directors money alleged to have been fraudulently converted to their use or illegally expended by them.

The corporation was organized in 1907. The history of its first decade is not involved in these proceedings. In 1917, defendants became owners of all of its issued common stock with the exception of qualifying shares held by employees of plaintiff who with defendants made up the board of directors, but who had no financial interest in the business.

This condition continued during the entire period covered by the bill, excepting that in 1918 Herman A. Fosdick purchased of the corporation, through Parker R. Waite, four bundred shares of the common stock, paying therefor $40,000, which Mr. Fosdick held until his death in 1922, and which was held by his estate from that time until the stock was repurchased from his executrix by the corporation in 1924.

The corporation was capitalized at $500,009 with an authorized issue of two thousand shares of common stock of a par value of $100, and three thousand shares of 6 per cent. cumulative preferred stock of the same par value, nonvoting except as hereinafter stated.

The preferred stock was not only preferred as to earnings and assets, but was issued subject to an agreement referred to in the record as the "preferred stock covenant," which read as follows:

"The holders of the preferred stock shall have no voting power except in the event of the failure of the corporation to pay the preferred dividend for six months after its regular date of payment in which case the entire voting power of the common stock holders of the corporation shall pass to the holders of the preferred stock as provided in these Bylaws, and shall remain in such preferred stock until its net earnings are sufficient to pay up arrears in its dividends. As long as any of the preferred stock is outstanding, the corporation's quick assets shall always exceed its entire indebtedness, both funded and floating, together with the amount of its preferred stock outstanding, and no mortgage or encumbrance of any nature shall be placed upon the assets of the company unless by the expressed agreement of the holders of at least 75% of such outstanding preferred stock properly given at a meeting of the preferred stock holders called for the purpose."

The business was profitable during the years 1917, 1918, 1919, and 1920, the net annual profits during that period averaging $50,000. During the next two years, following the general trend of business in the country, a substantial loss was occasioned by the writing down of inventory values and a readjustment from war-time prices to a lower level. This loss amounted to $147,000. In 1923, the profits were $50,000. In 1924, a loss of $46,000 was sustained; in 1925, the profits were negligible; and in 1926, there appears a loss of $19,000. Combining these figures, the total net profit for the ten years was, in round numbers, $10,000.

No dividends were paid on the common stock after 1912. In lieu of dividends, the directors distributed so much of the surplus earnings among themselves in the form of salaries and allowances as seemed to them consistent with the services rendered and their obligations to the creditors of the corporation and its preferred stockholders.

Dividends on the preferred stock were paid in full down to and including the semi-annual dividend of July, 1927.

The relation between quick assets and the combined amount of corporate debts and preferred stock issued was maintained in ac cordance with the terms of the covenant until September 24, 1924.

On February 24, 1927, Maude R Waite resigned as a director, as also did two of the employees of the company who were then acting in that capacity, and three of the preferred stockholders, each having been given a qualifying share of common stock, were elected to the board and constituted a majority thereof. Under the new management, 1927 showed a profit of $80 and 1928 a loss of nearly $60,000. There was a loss in 1929, not definitely stated in the record but somewhat less than in 1928.

No dividend was paid on the preferred stock in January, 1928, and on July 6, 1928, by authority of the provisions of the preferred stock covenant, the preferred stockholders took over the entire control of the corporation which they have since retained.

The corporation has always been solvent. In considering the various issues raised by the pleadings, the rights of creditors need not be regarded. In October, 1930, the liabilities of the company, exclusive of stock issues, amounted to but $05,000, while its assets were $475,000. The preferred stock amounted at par to $290,000. The remainder was represented by the common stock, of which at that time 773 shares were outstanding and which therefore had a book value of $155 per share. This situation obtained in spite of the fact that no profits were made after 1923, but on the contrary during the six subsequent years losses of approximately $175,000 were sustained. The creditors and preferred stockholders have always been amply protected.

The specific complaints in the bill may be summarized as follows: (1) Payment of salaries and other allowances without lawful authority and in excess of the value of services rendered; (2) payment of expense accounts alleged to have been excessive; (3) substituting Maude R. Waite in place of the corporation as beneficiary under policies of insurance on the life of Parker R. Waite; (4) payment of corporate funds in the purchase and retirement of common stock from the estate of Herman A. Fosdick; (5) payment of dividends on preferred stock of the corporation when the quick assets were less than the combined amount of the liabilities and the outstanding preferred stock.

A general charge of fraudulent conduct on the part of the defendants accompanies the allegations of these specific acts.

A fair analysis of plaintiff's claims is made difficult by reason of their exaggeration. If all of its contentions were sustained, it would be entitled to judgment for approximately $450,000, a sum more than sufficient to pay all of the debts of the corporation and retire the entire issue of preferred stock, after paying the accumulated dividends thereon. The allowance of these claims would also involve defendants' receiving no compensation whatever for ten years' services and no return on their investment. Such a result could hardly be seriously urged. Nevertheless it represents a summary of plaintiff's demands.

The bill is dated August 29, 1929. Many of the matters which are the subject of complaint occurred prior to August 29, 1923, and as to these defendants invoke the statute of limitations. On this point, plaintiff in its replication says that: "Defendants fraudulently concealed causes of action set forth in said bill in equity from said plaintiff and plaintiff further says fraud has been committed by the said Parker R. Waite and Maude R. Waite as set out in its said bill in equity which entitles said plaintiff to bring its said bill and said action was commenced within six years after plaintiff discovered that it had a just cause of action."

As a general rule, the statute of limitations begins to run against an action against directors of corporations for their malfeasance or nonfeasance from the time of the perpetration of the wrongs complained of. Williams v. Halliard, 38 N. J. Eq. 373; Spering's Appeal, 71 Pa. 11, 10 Am. Rep. 684. This does not apply in cases of fraudulent concealment, when the statute does not commence to run until discovery or until the time prior thereto when the exercise of reasonable vigilance would have disclosed the facts; and there is another exception to the rule—the statute does not commence to run where the defendant directors are in control of the...