Decatur Mineral & Land Co. v. Palm

CourtSupreme Court of Alabama
Citation113 Ala. 531,21 So. 315
Decision Date17 December 1896
PartiesDECATUR MINERAL & LAND CO. ET AL. v. PALM ET AL. [1]

Appeal from chancery court, Morgan county; William H. Simpson Chancellor.

Bill by Otto Palm and others against the Decatur Mineral & Land Company and others to remove directors, cancel outstanding claims, and for other relief. From a decree in favor of complainants, defendants appeal. Reversed.

Harris & Eyster, for appellants.

Humes Sheffey & Speake, for appellees.

COLEMAN J.

Otto Palm et al., minority stockholders in the appellant corporation, filed their bill, in which it is averred that appellants Thomas M. Scruggs and S. M. Nelson controlled a majority of the stock of the corporation, and used their power in the selection of the board of directors, and dominated the management of the corporation, for their personal advantage. The principal wrongs complained of consist in the election of incompetent and unfaithful persons as president and secretary, to wit, Thomas M. Scruggs and S M. Nelson, and the appropriation by the directors of exorbitant and unreasonable amounts to their salaries, and neglect of duty on their part. The bill prays for the removal of these and other members of the board of directors, for an injunction to restrain the board from voting unreasonable salaries hereafter, for an account to ascertain how much they have received over and above what is just and reasonable, a decree for such excess, and a cancellation of notes held by such officers against the corporation for unpaid salaries, in excess of what they should be allowed. The bill also prayed for a receiver. It will be seen from this statement of the purposes of the bill that the corporation is the proper complainant, and that stockholders are not allowed to apply to a court of equity for relief in such a case, except upon averment and proof that the corporation has refused, upon application, to remedy the wrong, or upon sufficient averments to show that application to the board of directors or stockholders would have been in vain, or the circumstances were such as to excuse the complaining stockholders from first seeking a remedy in this way, if there can be any other in any case. At the final hearing the court granted relief to complainants, in so far as the bill prayed for a cancellation of the outstanding and unpaid claims of the president and secretary for salaries, and awarded an injunction to restrain the board of directors from voting unreasonable compensation to said officers, and allowed complainants a solicitor's fee, to be paid by the corporation. The respondents appeal from this decree.

If the complainants were entitled to the relief granted, the benefit resulted to the corporation, and, through it, to all the stockholders, as such, alike. The complainants could receive no advantage which would not operate equally for the advantage of all the stockholders. If the corporation had filed the bill, there can be no doubt that its solicitors would have been entitled to reasonable compensation, to be paid by the corporation. Its refusal necessitated the filing of the bill by the stockholders. Under these facts, we have no doubt that the corporation is chargeable with whatever compensation the complainants' solicitors are entitled to. The amount of the fee, however, should have been determined from the evidence. We do not think the court could take judicial knowledge of the value of services rendered by the solicitors. Clark v. Knox, 70 Ala. 607. The evidence shows that S. M. Nelson and Kate Gutherz were sisters, and Thomas M. Scruggs their nephew; that these three stockholders owned but little less than a majority of the entire outstanding stock; that at some of the meetings of the stockholders their stock exceeded a majority of the stock present and voting; and that at other meetings their stock and that held by them as proxies constituted a majority. The stock owned by these three shareholders, and that controlled by them, was voted in concert, either S. M. Nelson or Thomas M. Scruggs generally voting that owned by Kate Gutherz. It is reasonably clear that they dominated the stockholders' meetings, and elected the board of directors, of which the said Scruggs and Nelson were always included as members. The by-laws authorized the directors to fix the salaries of the officers and elect them. Thomas M. Scruggs and S. M. Nelson were members of the board of directors which fixed the salaries of the president and secretary, and which elected them to these offices; and it is satisfactorily shown that both were instrumental in fixing the amount to be paid, and in electing themselves to their respective offices. The pleadings and evidence show that the board of directors consisted of seven members. In the seventh paragraph of the bill it is averred that four members, to wit, H. B. Scott, S. M. Nelson, Thomas M. Scruggs, and J. C. Eyster, met and re-elected Scruggs president, at a named salary; J. C. Eyster, vice president; and S. M. Nelson, secretary. Of necessity, Scruggs and Nelson voted for themselves. This averment is nowhere controverted. We are of opinion that the evidence leaves no room for reasonable controversy that the salaries voted to the president and secretary, when considered with reference to the duties required and performed by them, and the financial condition of the corporation, were out of all proportion, and unreasonable. These salaries not only consumed all the income, but encroached annually upon the capital assets, and, if continued, would eventually leave nothing for the stockholders. The duty of a director is to act for the interest of the stockholders, and manage the affairs of the corporation for their benefit, and not for his personal gain. There was a direct conflict between the duty owed by these directors to the stockholders and their self-interest, and, as is frequently the case under such conditions, the frailty of human nature sacrifices duty to self-interest. They fixed the salaries at exorbitant prices, and then elected themselves to the offices. The fact that the president may have been unwilling to accept the office at a less salary proves nothing in favor of the fairness and reasonableness of the amount. A minority stockholder who cannot obtain redress against such a wrong through the board of directors or the stockholders is entitled to the intervention of a court of equity. 1 Mor. Priv. Corp. §§ 508, 518, et seq.; Cook, Stock & S. § 657, and notes.

This brings us to the consideration of a question which vitally affects complainants' standing in a court of equity. The respondents demurred to the bill upon the ground that the bill admitted that complainants had not applied to...

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