Endicott v. Marvel
| Decision Date | 19 May 1913 |
| Citation | 81 N.J.Eq. 378,87 A. 230 |
| Parties | ENDICOTT et al. v. MARVEL et al. |
| Court | New Jersey Court of Chancery |
Bill by Mordecai T. Endicott and others against the St. Leonard's Land Company, Philip I. Marvel, and others, directors. On final hearing, decree setting aside a sale and for an accounting advised.
The amended bill herein has been filed by certain stockholders of the St. Leonard's Land Company for the benefit of that corporation. The relief sought is against five of its seven directors. The corporation is joined as a defendant because the board has refused to authorize the suit.
The controversy arises through loans of money made to the corporation by the five defendant members of its board of directors. The directors who made the loans each received from the company to secure the loans certain collaterals, which collaterals have since been applied in satisfaction of the loans. The amended bill seeks to enforce the restoration of these collaterals and an accounting.
In May, 1898, the corporation was in pressing need of money. At that time certain capital stock of the corporation (which stock is conceded to have been fully paid) was held by an individual in trust for the corporation, for purposes of sale by the corporation for its use. May 19, 1898, a resolution of the board was adopted authorizing the president and treasurer to borrow for the corporation $10,000, and to cause double that amount of the trust stock above referred to to be pledged as security for the loan. The resolution is vaguely worded, but its meaning has been made reasonably clear. Failing to find any person outside the board willing to make the loan, five members of the board, defendants herein, each loaned the corporation $1,500, and received therefor collateral notes of the corporation pledging 30 shares (par $3,000) of the trust stock already referred to. The other two members of the board refused to make similar loans. The money so borrowed was used to pay debts of the corporation. The minutes of the board disclose no resolution specifically authorizing these loans and pledges, but the testimony indicates that such a resolution may have been adopted at about the time the loans were made. The minutes are, in fact, so inadequately kept that they afford little light touching the transactions of the board. The notes were severally dated June 20, 1898. To one of the directors, who made a loan no note appears to have been given, but stock was issued to him to secure his loan. Under date of October 15, 1898, shortly before the notes matured, the minutes of the board disclose the following resolution as having been adopted:
This minute, like many others found in the minute book, is almost unintelligible standing alone. It appears to authorize an original loan for one year, whereas the loan had been already made by five members of the board, and the remaining two members, who were not present at that meeting, had positively refused to loan. The amount of collateral referred to in the resolution is 50 per cent. excess, whereas the amount which has been already given was 100 per cent. excess. The resolution is also silent touching the amount to be credited to the company for the collateral in the event of the company failing to redeem it The testimony of the directors who made the loans, and who were all present at this meeting, is that the resolution which was adopted was to enable the company to have one year in which to redeem the stock which had already been pledged, failing in which the stock should then become the absolute property of the pledgees and the indebtedness of the company became thereby discharged. The testimony of one of the directors who made no loan is to the effect that he never knew of any action of the board limiting the period of redemption until shortly before the bill was filed, and that he had, from time to time, urged at board meetings the redemption of the stock. The earliest date at which he could positively state he so urged at a board meeting was in the year 1902. No further action touching these loans appears to have been taken by the board before February, 1904, and a dispute exists touching the action which it is claimed was taken by the board at that time. It is claimed that at that time a redemption of the stock of the company was urged by the two "dissenting" members of the board and resisted by the five members who had made the loans, and that one of the dissenting members then offered a compromise resolution, to the effect that one-half of the pledged stock should be surrendered and the remaining portion retained by the pledgees, to the end that the amounts paid by the several pledgees should be the par value of the stock by them retained. The testimony touching the compromise resolution is in hopeless conflict The two dissenting members of the board testify that the resolution passed with one of them voting against it. The other members of the board testify that no such resolution was ever adopted. It is probably impossible to state, with entire certainty, what the truth may be touching this resolution. Its absence from the minute book is of little or no probative force, in view of the way the minutes were kept. None of the transactions herein referred to have at any time been brought to the attention of a stockholders' meeting of the corporation. At a meeting of the board August 17, 1909, a further demand for the return of the pledged stock was peremptorily refused, and permission to permit suit to be brought by the company was also denied. This suit is therefore brought by stockholders in behalf of the corporation to enforce the rights of the corporation.
Allen B. Endicott, of Atlantic City, and Joseph H. Gaskill, of Camden, for complainants.
Bourgeois & Coulomb, of Atlantic City, and Robert H. McCarter, of Newark, for defendants.
LEAMING, V. C. (after stating the facts as above). It will be observed that present conditions have arisen from two several transactions authorized by the board of directors of the corporation in which complainants are stockholders. The first transaction was a loan to the corporation by five of the seven members of its board. The notes of the corporation which were executed for the money so loaned were collateral notes in the usual form, pledging as security the stock here in question. No objections to that transaction have been urged by complainants. The corporation was in urgent need of the money, and efforts to procure the loan from others, with the same collateral, had failed. The second transaction occurred when these notes fell due. That transaction was an engagement, entered into at a meeting of the board between the corporation and these five directors to the effect that the corporation should have one year's time in which to redeem the collateral by paying back the money, failing in which the collateral should then become the absolute property of the directors who made the loans, and the indebtedness of the corporation should be thereby discharged.
It will be perceived that this was an engagement made by the corporation, through the medium of its board of directors, with members of its board, touching property of the corporation. The infirmities of such a contract, which arise from the circumstance that it is made by the board with members of the board, have been repeatedly defined in this state. Such contracts are not void by reason of the circumstance stated; they are voidable. They cannot be enforced, as such, against the will of the corporation, promptly asserted. Enforceable obligations of the corporation may arise from the transaction—such as an obligation to repay money loaned—but cannot arise from the convention as against the promptly asserted will of the corporation.
There will he found in reported cases statements to the effect that a contract voidable because made between a corporation and its directors may be avoided or repudiated by the corporation at the instance of a stockholder; the suggestion being that upon a bill being promptly filed by a stockholder in behalf of the corporation the voidable contract becomes thereby void and its contractual force destroyed. It seems clear that...
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