Davis v. Memphis City Ry. Co.

• Decision Date: 06 February 1885
• Citation: 22 F. 883
• Parties: DAVIS v. MEMPHIS CITY RY. CO.
• Court: U.S. District Court — Western District of Tennessee

22 F. 883

DAVIS v. MEMPHIS CITY RY. CO.

United States Circuit Court, W.D. Tennessee.

February 6, 1885

The suit was for $1,650, balance due Davis for his salary at the time he resigned from the company and turned the management over to the new parties who purchased his interest. The defense was that Davis had fraudulently procured the directors to fix his salary at an excessive sum, and that he had paid large sums of money, amounting to over $2,000, to Humes & Poston, as attorneys in the chancery case of Bills v. Davis, and the other directors, for a maladministration of the affairs of the company; the contention being that it was a suit against Davis, Barrett, and others, individually, in which the company had no interest. There were also other sums claimed as a set-off for fees paid these attorneys, of which the jury allowed, as set-off, a part paid in a litigation to defeat the forfeiture of the Citizens' Railroad Company, a rival corporation.

The evidence was that Davis owned a very large majority of the stock, and all the other directors were small holders of stock purchased of him to qualify them as directors. He had been also president of a bank, during which time the vice-president of the railway company had received a salary and there was also a purchasing agent, but, when the plaintiff retired from the bank, the salary of the railway presidency was increased, and the duties of purchasing agent added to the presidency; but the vice-president's salary was reduced, and by the changes there was a reduction of the aggregate salaries to a considerable amount, notwithstanding the large increase in that of the president. Proof was offered to show that, notwithstanding the reduction, the salary was excessive; that it was established to furnish Davis with an income; that he discharged the duties inefficiently and negligently, and managed the affairs of the company badly. He met this by proof offered to show to the contrary of all this.

The chancery suit of Bills was one by a stockholder, to hold the directors personally liable for maladministration, and resulted in a report of the master charging them each with a very large, personal liability. The chancellor rendered an opinion, also holding them to a large liability, but no decree was entered, because Davis had bought out the plaintiff in that suit, and one of the directors, who had continued the litigation against the others on a cross-bill being also charged by the chancellor with a large personal liability, compromised with Davis after the opinion was filed; and the matter was arranged by all the stockholders joining in the compromise. Subsequently, Davis sold out part of his interest, gave up the control, and ultimately left the company altogether. In the Bills suit the directory were enjoined from issuing $200,000 of the bonds of the company provided to pay its floating debt and to make improvements and a receiver was demanded. The receiver was refused, and the injunction modified to allow the directory to issue one-half the bonds, the other being enjoined. There was no office of attorney, but the directors each year, by resolution, elected or employed a regular attorney for the company, and one was so employed at the time of the expenditures for additional counsel.

The court, (HAMMOND, J.,) among other things, charged the jury as follows:

'Undoubtedly the defendant company had a right to demand that the directors should fix the salary with sole reference to the interest of the company, and without any reference to the selfish interests of the incumbent. His private interests were entitled to no consideration at his hands in acting in his capacity as a director, and to none at the hands of the other directors. His interest required, of course, that he should receive as much as the company would pay, and its interest demanded that the president should be paid as little as was consistent with the benefit of securing the services of a first-class and efficient man. This the directors had a right to secure, and to pay for such services a fair and reasonable compensation. Nor can they be held guilty of a fraud because of a mere error of judgment on their part. If, acting honestly and in good faith to secure what they believed to be the best interest of the company, they fixed the salary at too high a figure, as now appears from the proof,-- if it does so appear to you,-- it is none the less binding on the company, for that would be a mere error of judgment, and you should answer the first question put to you in the negative. But if you believe from the proof that the plaintiff, Davis, being the controlling stockholder, with absolute power to elect the board by a vote of his stock, packed the directory with his especial friends, who were ready and willing to do his bidding, and that he and they deserted the interest of the company, and, for his selfish benefit, fixed a salary that was beyond the sum it should have been, that action was fraudulent, and you should answer the first question submitted to you in the affirmative.'

On the set-off the court charged the jury that the president had the right to employ additional counsel to represent the company in any litigation in which it was interested, although it had regular attorneys, provided the employment was an honest exercise of reasonable judgment, and not a mere pretext to give fees to his friends or to pay his own counsel out of the money of the company; the general principle being that, in all he or the directors do, the sole interest of the company should be the guide, and that they shall not use the funds of the company for their own benefit, even though they may own or control the great majority of the stock. The proof was that Davis was absent, sick, for about two months of the time sued for, but the vice-president agreed to and did act for him, and no injury to the company was shown. The court charged the jury on this point that, in the absence of any injury from the absence, it was, under the circumstances, immaterial; that it would be a harsh rule to deprive an officer of a corporation of salary during sickness, if he guarded against injury by securing the services of the very officer elected to act in his absence.

The jury, under the instructions of the court, returned a special verdict, on issues agreed upon by the counsel, as follows:

(1) 'Was the action of the board of directors, in fixing the salary of the plaintiff as president of the defendant corporation at $3,600 per annum, done fraudulently? ' Answer of jury. No.

(2) 'Without reference to the contract, what were the services of the plaintiff worth to the defendant during the time here sued for? ' Answer of the jury. $1,650.

(3) 'Did the plaintiff perform the duties of president and purchasing agent of the defendant during the time for which he has here sued? ' Answer of the jury. Yes.

(4) 'How much of the defendant's money, if any, did the plaintiff cause to be paid to Humes & Poston, W. Y. C. Humes, and to W. Y. C. Humes & L. W. Humes for his own benefit, and here you will set out specifically each sum you may find to have been so paid? ' Answer of the jury. Citizens' Railroad, $250; to Humes for Turner, $35; total, $285.

(5) 'Should either party be allowed interest upon such sum as may be due from one to the other? ' Answer of the jury. No.

On this special verdict the judgment...