Gen. Mortg. & Loan Corp. v. Guar. Mortg. & Sec. Corp.

• Decision Date: 29 June 1928
• Citation: 162 N.E. 319,264 Mass. 253
• Parties: GENERAL MORTGAGE & LOAN CORPORATION v. GUARANTY MORTGAGE & SECURITIES CORPORATION et al.
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

264 Mass. 253

162 N.E. 319

GENERAL MORTGAGE & LOAN CORPORATION

v.GUARANTY MORTGAGE & SECURITIES CORPORATION et al.

Supreme Judicial Court of Massachusetts, Suffolk.

June 29, 1928.

Appeal from Supreme Judicial Court, Suffolk County.

Suit by the General Mortgage & Loan Corporation against the Guaranty Mortgage & Securities Corporation, Francis T. Meagher, and others. From a decree against defendant Meagher only, he and plaintiff appeal. Affirmed.W. Powers, of Boston, for General Mortgage & Loan Corporation.

J. F. Bassity, of Boston, for defendants Meagher, McCarthy, and Reed.

CROSBY, J.

[1] This is a bill in equity brought for an accounting, and to recover for secret profits and corporate funds alleged to have been unlawfully expended by the defendants, and for other relief. During the course of the hearing six defendants settled their differences with the plaintiff by paying ot it various amounts. The only defendants remaining are Francis T. Meagher, McCarthy and Reed. Demurrers filed by these three defendants were overruled; the same defendants also filed a plea in bar which was overruled; the questions of law thereby raised, not having been argued, are to be taken as waived. The case was referred to a master whose report and supplemental report were confirmed and a final decree was entered against the defendant Francis T. Meagher, and in favor of the defendants McCarthy and Reed. The plaintiff and the defendant Francis T. Meagher appealed from the final decree.

The bill alleges that the plaintiff corporation had a large amount of cash and liquid assets at all times during which the alleged wrongful acts of the defendants were alleged to have been committed; that four of the defendants who have settled with the plaintiff were directors and stockholders of the defendant corporation; that one defendant who settled was president of the plaintiff; that the defendants Meagher and McCarthy were directors and stockholders of the plaintiff; that the defendant Reed was an attorney at law and counsel for Meagher and other defendants; that the defendant corporation, Johansson and Downey, all of whom have settled with the plaintiff, fraudulently conspired together to defraud the plaintiff, and that Meagher, McCarthy, Reed and other defendants, at the time or later, joined in the conspiracy. The bill alleges the conspiracy to be that the defendants should obtain control of the plaintiff corporation and of the administration of its funds by the purchase of a majority of its voting stock, by depriving the holders of certain other voting stock of their rights to vote the same, by excluding certain of its directors from the directors' meetings, and by the pretended election of certain of the defendants as directors and as other officers; that the defendants, or some of them, should, after obtaining control of the plaintiff or its board of directors, cause a sale of all the common stock then in its treasury to one of the directors, who should buy it on his own behalf and on behalf of another director and the defendant corporation, at a price made by the defendants and known to them to be inadequate and in fraud of the plaintiff; that the defendants should, after obtaining control of the plaintiff and its funds, administer such funds for their own benefit in fraud of the plaintiff, and ‘divert, and retain to their own use various secret profits by means of fees and extra bonuses to be charged by them on loans to be made by their procurement, fees as counsel, fees for inspection, salaries, and by other means, without due disclosure thereof to the board of directors or to the stockholders of the complainant; should in their own interests deprive the complainant of legitimate profits; should use the moneys or a part of the moneys of the complainant as their own and mingle them with their own funds; and should in general do such things as they thereafter did and as are hereinafter set forth.’ The bill further alleges many other unlawful acts on the part of the defendants which resulted in serious losses to the plaintiff and which are referred to and dealt with in the master's report.

[2] The master found that, before April 21, 1924, one Pheeny, who is not a party to this suit, was the largest stockholder of the plaintiff, and acted as its general manager and that he had practical control of the corporation; that after that date and until January 27, 1925, the business of the plaintiff was entirely in the hands of the defendants Johansson and Downey, who had then become directors of the plaintiff, and one of them was acting as its treasurer and general manager and the other as its attorney; that the desire of these two defendants to obtain a majority of the stock of the plaintiff ‘was for the purpose of personal gain only. The profits that might be earned by the corporation through their activities was only a secondary consideration’; that they did not invest any of their personal funds in the endeavor to obtain a controlling interest, but that they had a vital personal interest in its management; that one of them received a salary of $6,000 a year as treasurer and general manager and collected inspection fees from borrowers amounting to large sums; that the other acted as a member of the loan committee for which he received a salary, and collected fees from borrowers in the examination of titles, and also benefited by his ability to obtain loans from the plaintiff for his personal clients whom he charged a commission in addition to his fees as attorney. It was also found that these two directors from April 21, 1924, to January 27, 1925, invested funds of the corporation by loaning money on both good and bad securities; that they made two large loans on insufficient security and that the corporation thereby lost $40,296.49; that these loans were made in order to enable them to obtain large inspection and counsel fees. The master further found that the total damage to the plaintiff by reason of the unlawful acts of the defendants was $60,689.31, and that most of the acts which caused the damage were prompted by these two directors who were the actual beneficiaries. As the evidence is not reported, the findings of the master are conclusive unless it appears from the report itself that they are plainly wrong. We will first deal with the findings of the master against the defendant Meagher.

[3][4] It is plain that the loans made by the two directors before referred to, in pursuance of their scheme to get control of the corporation ‘for the purpose of personal gain only,’ were a breach of the fiduciary duty which they owed to the plaintiff. United Zinc Cos. v. Harwood, 216 Mass. 474, 476, 103 N. E. 1037, Ann. Cas. 1915B, 948;Allen-Foster-Willett Co., Petitioner, 227 Mass. 551, 556, 116 N. E. 875;Abbot v. Waltham Watch Co., 260 Mass. 81, 95, 96, 156 N. E. 897. These directors purported to act as directors of the corporation and were liable, if they acted in bad faith, whether they were directors de jure or de facto. Thayer v. New England Lithographic Co., 108 Mass. 523, 527;Hudson v. J. B. Parker Machine Co., 173 Mass. 242, 246, 247, 53 N. E. 867;Lazenby v. Hunderson, 241 Mass. 177, 180, 135 N. E. 302;Cunningham v. Commissioner of Banks, 249 Mass. 401, 430, 144 N. E. 447.

[5][6] Meagher was a director of the plaintiff corporation, and while not responsible for errors of judgment, he was charged with the duty of managing its affairs honestly and in good faith. It this duty was violated and resulted in impairment of the corporation assets and loss of its property, he can be compelled in equity to make restitution. The findings of the master show that Meagher participated in the plan of Johansson and Downey to obtain control of the plaintiff; that in March, 1924, these two directors of the Guaranty Mortgage & Security Corporation, and one Johnson, another director, caused a vote to be passed by the defendant corporation to authorize them to purchase the control of the stock in a ‘similar corporation’ and employed one Bishop, a broker, to negotiate for such purchase; that Bishop saw Meagher and asked him if he could obtain a controlling interest in the plaintiff for his customers; that Meagher told him that he was able to do so, that he felt he could deliver to Bishop's customers the stock of his brother and that of two other stockholders, and his own shares, and, with the two hundred and sixty-three shares held by one Mulready and the purchase of one hundred and fifty-five shares of common stock in the treasury, he could transfer a majority of the common stock. The master also found that on April 13, 1924, Meagher, in pursuance of the plan to obtain a majority of the common stock, went to see Mrs. Mulready and endeavored to purchase her stock and was incensed because she had sold it to Pheeny; that the next day he informed his attorney, the defendant Reed, of his interview with Mrs. Mulready, and, accompanied by Reed, he again saw Mrs. Mulready and informed her that she had been ‘tricked’ by Pheeny and that she was entitled to a larger sum for her stock; that he then obtained an option from her to purchase it on its recovery from Pheeny; that afterwards a bill in equity was brought by Reed in the name of Mrs. Mulready against Pheeny to recover the stock; that the suit was to be without any expense to her; that on April 16, 1924, Meagher met Bishop and told him he might obtain control and sell the stock if his (Bishop's) customers would act quickly. A meeting was thereafter arranged between...