E. C. Warner Co., In re, 35205

• Decision Date: 15 December 1950
• Docket Number: No. 35205,35205
• Citation: 45 N.W.2d 388,232 Minn. 207
• Parties: In re E. C. WARNER CO.
• Court: Minnesota Supreme Court

Page 388

45 N.W.2d 388

232 Minn. 207

In re E. C. WARNER CO.

No. 35205.

Supreme Court of Minnesota.

Dec. 15, 1950.

Syllabus by the Court.

1. Although a corporation is named as a defendant in a derivative suit, such action by a minority stockholder is essentially for the benefit of the corporation, and in that beneficiary sense the corporation, although standing as a neutral Pendente lite, is the true plaintiff.

2. The position of director of a corporation, though fiduciary in many respects, is Sui generis and is not to be confused with the position of that of a trustee, quasi-trustee, or agent.

3. Irrespective of any showing of direct or tangible benefit to the corporation, a corporate director, After he has been vindicated on the merits in a shareholder's derivative suit charging him with dereliction of duty, is entitled to be repaid his reasonable expenses out of corporate funds.

4. What is a reasonable amount for defense expenses, inclusive of attorney's fees, to be allowed a director after he has been judicially vindicated upon the merits in a derivative action, rests in the sound discretion of the trial court.

5. A receiver in voluntary dissolution proceedings is vested with a sound discretion as to whether he shall directly contest a claim; or present to the court for approval a proposed compromise, composition, or settlement thereof; or whether the claim should be presented to the court, without recommendation, for the determination of a question of law; and he fully performs his duty when he presents all factual matters and all legal questions of corporate liability to the court with ample opportunity for the claimants and objectors to argue the issues.

R. H. Fryberger, M. R. Keith, Minneapolis, for objectors-appellants.

Dorsey, Colman, Barker, Scott & Barber, Morley, Cant, Taylor & Haversock, and W. C. Preus, all of Minneapolis, for respondents.

MATSON, Justice.

Appeal from an order directing the liquidating receiver of the E. C. Warner Company, a corporation, to pay $15,000 to claimants, two legal firms, ¹ as fees for legal services performed in successfully defending an officer and director of said corporation in three derivative actions.

If a stockholder's derivative action brought to recover for waste and depletion of assets alleged to have been caused by dereliction of duty by an officer and director Is terminated upon the merits in favor of such director and officer, may the corporation Thereafter be required to pay the attorneys' fees which were incurred by him for his own personal defense and vindication? This primary issue arises from three representative suits brought by a minority stockholder against the E. C. Warner Company, a corporation (as a nominal defendant), and against A. E. Wilson, who was president and treasurer of the corporation as well as a director. Upon appeal to this court from an order overruling plaintiff's demurrers to certain defenses, such order was affirmed and in effect the entire action was terminated upon the merits in favor of defendant Wilson. See, Warner v. E. C. Warner Co., 226 Minn. 565, 33 N.W.2d 721. Two other derivative actions, involving substantially the same issues and therefore controlled by the above decision, have, without appeal, been terminated in favor of said A. E. Wilson.

Shortly after the termination of such derivative suits, a petition for a voluntary dissolution of the corporation pursuant to M.S.A. § 301.47 was filed, and on March 7, 1949, the district court made an order dissolving the corporation and appointing W. C. Preus as receiver. This was followed by an order directing creditors of the corporation to file their claims and setting a date for a hearing thereon. Messrs. Morley, Cant, Taylor & Haverstock and Messrs. Dorsey, Colman, Barker, Scott & Barber, the respondents herein, filed a claim of $15,000 for the legal services which they had rendered to A. E. Wilson in successfully defending and vindicating him against charges of alleged misconduct as an officer and director. A hearing on objections to the allowance of said creditors' claim was finally set for November 23, 1949. Notice of the hearing was seasonably given to all stockholders, inclusive of the appellants herein.

On October 18, 1949, the receiver filed his report, which set forth the nature of respondents' claim for attorneys' fees and Requested the court, because the receiver was doubtful as to the propriety of the claim, to determine at the hearing whether it was valid and, if valid, whether it was reasonable as to amount. On November 8, 1949, appellant stockholders served a demand on the receiver that he object to the claim for Mr. Wilson's attorneys' fees. On November 10, 1949, the receiver filed his second report, by which appellants set out their objections to respondents' claim, submitted said objections to the court for its consideration, and requested permission to present appellants' objections at the hearing by their counsel. The requested permission was granted. At the hearing on November 23, 1949, counsel for appellants and for claimants presented arguments to the court on the question of corporate liability on the claim. The court by order filed January 5, 1950, allowed, and directed the receiver to pay, said claim. It is from the latter order that the minority stockholders and objectors to said claim have taken this appeal.

1. It is important to bear in mind that although a corporation is named as a defendant in a derivative suit, such action by a minority stockholder is essentially for the benefit of the corporation, and in that beneficiary sense the corporation, although standing as a neutral Pendente lite, is the true plaintiff. Meyers v. Smith, 190 Minn. 157, 251 N.W. 20; Solimine v. Hollander, 129 N.J.Eq. 264, 19 A.2d 344; Ballantine, Corporations (Rev.ed.) § 154. It is uniformly held that if in his derivative action a plaintiff stockholder is successful upon the merits so as to confer a tangible corporate benefit he is entitled to be reimbursed by the corporation for his reasonable expenses, inclusive of attorney's fees. ² But what is the position of a defendant director if he is successful in securing a vindication upon the merits in such action? May he look to the corporation for reimbursement for his attorney's fees and expenses? If he may, is his right of recovery dependent upon being able to show that his successful defense has conferred a specific corporate benefit? Clearly, neither party to a derivative action is entitled to payment or reimbursement of any expenses incurred, or to be incurred, prior to, and in the absence of, a successful result upon the merits. The ultimate result of the litigation is controlling. In the interim, as a matter of fair play, the corporation with all its assets stands impounded as a neutral.

'* * * There is a vast difference between letting a director fight the battle at his own expense--with reimbursement if he is vindicated--and using the power of the corporation to aid in the fight before it is shown whether or not he is a faithful servant who deserves indemnity. * * * The rule under discussion is designed to produce fair play--to prevent the plaintiff from being overwhelmed by the company's financial power before the real defendants have shown their guilt or innocence.' 40 Col.L.Rev. 431, 438--439.

2. The question as to the right of a judicially vindicated director to reimbursement is an open one in this jurisdiction. ³

Relatively few courts have dealt with the problem, and their decisions are by no means uniform in conclusion or as to the theory upon which they have proceeded. In Figge v. Bergenthal, 130 Wis. 594, 625, 109 N.W. 581, 592, 110 N.W. 798, the court allowed a recovery for no other reason than that 'if no case is made against defendants it is not improper or unjust that the corporation should pay for the defense of the action.' In Griesse v. Lang, 37 Ohio App. 553, 175 N.E. 222, a right of recovery was denied principally on the basis that the vindicated directors had not thereby conferred a benefit on the corporation. ⁴ In Solimine v. Hollander, 129 N.J.Eq. 264, 19 A.2d 344, the court, although it found a corporate benefit, held such benefit not to be essential to a right of recovery and allowed recovery on the basis of sound policy. In New York Dock Co. Inc. v. McCollom, 173 Misc. 106, 16 N.Y.S.2d 844, a right of recovery was denied, in that no substantial benefit accrued to the corporation. ⁵ No purpose will be served by a review of, or an attempt to reconcile, the various decisions. See, Annotation, 152 A.L.R. 909, 922--928. Confusion has resulted from a failure to recognize that the position of a director of a corporation, though fiduciary in many respects, is Sui generis ⁶ and is not to be confused with the position of that of a trustee, quasi-trustee, or agent. ⁷

'* * * The apparent confusion in this variety of terms has been provocative of efforts to define the director's position wholly in terms of one or the other of these concepts. Such efforts, however, misconceive the problem; the total status of a modern director is a composite of legal relationships and cannot be defined in terms of any one alone.' 20 Iowa L.Rev. 808. ⁸

3. Any corporate or other artificial body, which by specific grant or by virtue of compliance with certain statutory conditions (such as compliance with a general incorporation law) is permitted to operate as a collective unit separate and apart from its individual members and is otherwise vested with privileges not common to the citizens in general, is thereby accorded by favor of the state a status which by its very nature carries with it an inherent obligation that its acts shall be compatible with the public welfare. It goes without saying that it is not the function of the state, by general act or otherwise, to confer, or give legal significance to, a unique status or special privilege except on the implied condition that it shall be...