Godley v. Crandall & Godley Co.

• Decision Date: 09 June 1914
• Citation: 212 N.Y. 121,105 N.E. 818
• Parties: GODLEY v. CRANDALL & GODLEY CO. et al.
• Court: New York Court of Appeals Court of Appeals

212 N.Y. 121

105 N.E. 818

GODLEY

v.CRANDALL & GODLEY CO. et al.

Court of Appeals of New York.

June 9, 1914.

Appeal from Supreme Court, Appellate Division, First Department.

Action by Elizabeth McM. Godley against the Crandall & Godley Company and others. From a judgment of the Appellate Division (153 App. Div. 697,139 N. Y. Supp. 236) modifying and affirming a judgment granting relief to plaintiff, both parties appeal. Modified and affirmed.

See, also, 154 App. Div. 941,139 N. Y. Supp. 1124.William Russell Osborn, of New York City (David Bennett King, of New York City, on the brief), for plaintiff.

Edgar T. Brackett, of Saratoga Springs (James J. Allen, of New York City, on the brief), for defendants.

MILLER, J.

This is a representative action by the plaintiff as stockholder of the defendant Crandall & Godley Company to compel its officers to account for the wrongful diversion of its money and property to themselves and others. It is the typical case of a dispute arising from the incorporation of a trading partnership followed by the death or incapacity of one of the members and the adoption by the others of measures to limit the dividends of the inactive shareholder to what they conceive he ought to have. I shall consider under separate heads the objections to the judgment earnestly pressed by the learned counsel for the defendants, appellants.

1. The stock of the defendant corporation, and of its predecessor, a New Jersey corporation, was substantially all owned by the partners upon the organization of the corporation, William D. Godley, the husband of the plaintiff, and Lyman F. Pettee, the testator of the defendants, Mary E. Pettee, Harry E. Pettee, and William C. Pettee. A small amount of stock was allotted to favored employés under an arrangement by which they were permitted to pay for the same from dividends. The defendant corporation was organized in May, 1895. Said Godley became ill and incapaciated soon thereafter and died in December, 1897; the plaintiff succeeding to his ownership of the stock. The said defendants' testator succeeded Godley as president and, together with the employé stockholders, held a majority of the stock and controlled the corporation. Godley had been president and said testator vice president of the New Jersey corporation. They had divided the earnings so that, in addition to salaries of $5,000 and $3,000 respectively equally divided between them, they and the other common stockholders had each received 15 per cent. for the year 1892, 15 per cent. for the year 1893, and 13 per cent. for the year 1894, which was credited to the stock account on the books of the company. On the 8th of July, 1896, and on the 1st of March, 1897, the directors adopted the following resolutions respectively:

‘In order to show due appreciation to some of our best and trusted employés, be it resolved that we make to those an increase in salary for the year 1895 an amount that we can agree upon to those we deem worthy according to their ability and service to the company, as has been the custom heretofore.’

‘Be it resolved that in order to show due appreciation to some of our best and trusted employés, we make to those an annual increase in salary to continue until revoked by the board of directors.’

Acting thereunder, they paid to themselves and the employé stockholders each year, from 1895 to 1908 inclusive, 9 per cent. upon the common capital stock held by each, except in the years 1906, 1907, and 1908, when said amounts were paid only to the employé stockholders. During those years the directors received additional amounts under another resolution to be considered under the following head. Neither the plaintiff nor her husband shared in that distribution. A dividend of 6 per cent. to all common stockholders was declared and paid each year except in 1907, when 7 per cent. was paid, and in 1908, when none was paid. The additional amounts of 9 per cent. per annum paid to themselves and to the employé stockholders were called by the directors ‘additional salaries.’ But the amounts were determined solely by the amount of stock held by the distributees and were not measured by the services performed by them for the company. They were paid without any action of the board of directors save for the two resolutions hereinbefore quoted. Said amounts were paid at the end of each year from the surplus profits and were charged on the books against profit and loss. The Special Term required the defendants who were directors to account for and pay over all of the sums thus paid out as additional salaries during the period of their several directorships. The Appellate Division modified the judgment by limiting the recovery to the sums paid to the directors themselves on the theory that they could be held accountable for increases of salaries voted to themselves but not for increases voted to mere employés. Both parties appeal from that part of the judgment. The argument of the defendants, stated with much plausibility and force, is based on the premises that the complaint alleged, and the Special Term found, that the extra amounts of 9 per cent. on the capital stock were paid as discriminatory dividends, and that the Appellate Division held them to be additional salaries. It is concluded from one premise that the plaintiff, not the corporation, was injured, and that her remedy is an action against the corporation to compel it to set off and pay to her her share of the dividends (see Peckham v. Van Wagenen, 83 N. Y. 40, 38 Am. Rep. 392), and from the other, that the judgment is erroneous both because no such issue was presented by the pleadings and because there is no proof that the additional salaries were not earned.

[1][2] We think that some confusion of thought has resulted from the use of terms. A stockholder may not maintain an action against a corporation to recover a dividend until one has been declared. If a dividend had been declared but withheld from the plaintiff, her remedy would doubtless have been the one suggested by Judge Rapallo in the case just cited supra. In the case at bar, however, no dividend was declared except the 6 per cent. dividend paid to the plaintiff as well as to the other stockholders. There is at least some evidence to sustain the finding that the directors distributed the surplus earnings of the corporation among themselves and certain employé stockholders under the guise of additional salaries but upon the uniform basis of 9 per cent. of the common capital stock held by each, and not according to the services rendered the corporation by the distributees. Plainly, such a distribution of assets was without consideration and a wrong to the corporation itself, and it is immaterial that the plaintiff called the payments dividends and that the directors called them additional salaries . The facts were sufficiently pleaded to present the question, and the facts found are sufficient to sustain a recovery. However, the judgment should be modified by striking out the recovery for the years prior to 1897.

[3] It is plain both from the complaint and the proof that the plaintiff sought to recover only the sums paid since 1897. There is a general allegation that since the organization of the defendant corporation the said defendants' testator entered into a plan with the other directors and officers, whom he controlled, and caused to be paid to himself and them various sums of money called extra salary or compensation which they illegally voted to themselves. But the specific allegation is that the said defendants' testator caused dividends amounting to 15 per cent. to be paid to the employés since the year 1897, claiming that [212 N.Y. 129]6 per cent. thereof only was dividend, and the balance, or 9 per cent., additional salary, and that he and the other officers caused unlawfully increased salaries to be paid to themselves since the year 1897; and the prayer for relief is that the defendants be required to account for any pay over the sums paid from the year 1897 to the end of the year 1906 together with increases of salary voted for the years 1906, 1907, 1908, and 1909. Indeed, the prayer for relief was limited to the sums alleged to have been improperly paid to the officers themselves. But the plaintiff without objection proved the sums paid the employé stockholders, so the variance in that respect may be disregarded. However, the plaintiff proved under this head the payment of only $103,248 as so-called additional salaries beginning with the year 1897, and yet she was allowed to recover $125,928 and interest going back to and including the year 1895. The defendants as a part of their case, for the purpose of justifying the payments after 1897 by showing a continuous course of conduct, proved the payments made prior thereto, both by the defendant corporation and its predecessor. But there was nothing in the pleadings or the plaintiff's proof, or by way of motion or suggestion on the trial, or indeed until the findings were made by the trial judge, to warn the defendants that the plaintiff sought to recover anything except the payments made under the resolution of 1897 and after the death of her husband, when she succeeded to his stock ownership.' Payments made during Godley's lifetime may possibly have stood on a different footing. The defendants say that the complaint should not be treated as amended without giving them an opportunity to plead the statute of limitations. The recovery demanded was for a period of more than ten years prior to the commencement of the action. The court found that the payments were concealed from the plaintiff and not discovered by her until about January, 1909. It is unnecessary now to decide whether that fact would constitute an answer to the defense of the statute of limitations if pleaded. While we construe pleadings liberally and amend them to conform to the proof where no prejudice can result to the defeated party, a defendant...