Lofland v. Cahall

• Decision Date: 26 October 1922
• Court: United States State Supreme Court of Delaware
• Parties: WILLIAM C. LOFLAND, JAMES T. LANK, HARLAND M. JOSEPH, WILLIAM E. TUNNELL, WILLIAM H. BOOKHAMMER, JOHN R. BAYLIS AND WILLIAM J. THOMPSON, Defendants below, Appellants, v. JOSEPH L. CAHALL, Receiver of Lewes Fisheries Company, Complainant below, Appellee

118 A. 1

13 Del.Ch. 384

WILLIAM C. LOFLAND, JAMES T. LANK, HARLAND M. JOSEPH, WILLIAM E. TUNNELL, WILLIAM H. BOOKHAMMER, JOHN R. BAYLIS AND WILLIAM J. THOMPSON, Defendants below, Appellants, v. JOSEPH L. CAHALL, Receiver of Lewes Fisheries Company, Complainant below, Appellee

Supreme Court of Delaware

October 26, 1922

APPEAL FROM COURT OF CHANCERY. From a decree entered in the Court below in accordance with the opinion reported in 12 Del.Ch 299, an appeal was taken by these appellants. The facts sufficiently appear in the opinion of the Supreme Court.

David J. Reinhardt, Richard S. Rodney and James M. Tunnell, for the appellants.

Henry Ridgely and George M. Fisher, Jr., for the appellee.

PENNEWILL C. J., and RICE, HARRINGTON, and RICHARDS, JJ., sitting.

OPINION

PENNEWILL, C. J.

The Lewes Fisheries Company was organized under the General Corporation Law of the State of Delaware (22 Del. Laws c. 394) in January, 1911. Its authorized capital stock was two thousand shares par value one hundred dollars. Its business was the catching of menhaden fish and the manufacture therefrom of fertilizer and oil. It acquired a site at Lewes, Delaware, built a factory and purchased a fishing steamer in the spring of 1911; and in the same year had two other fishing boats built for its use. Subsequently the company purchased other fishing boats, some of which it afterwards sold, and continued in the operation of its factory and boats from shortly after its organization until September, 1917.

The incorporators of the company were Lofland, Bookhammer and Thompson, three of the appellants, and D. W. Burbage, who is not a party to this suit.

The first directors, elected January 10, 1911, were Lofland, Bookhammer, Baylis, Thompson, Lank, Joseph and Burbage, all of whom continued in office until August, 1912, when Burbage ceased to be a director. From that time, the board consisted of the six members first mentioned until Tunnel was elected in 1916. Thereafter the board consisted of seven directors.

The officers of the company were Lofland, president, Burbage, vice-president, until his retirement from the board, when Bookhammer succeeded him, Lank, secretary, Baylis, treasurer until 1913, when he was succeeded by Thompson, who was followed by Lank, secretary and treasurer during 1916 and 1917. Lofland was also General Manager of the company during its existence.

Neither the charter nor the by-laws of the company authorized the payment to the directors, of salaries or compensation for services.

All of the directors owned a substantial amount of the capital stock of the company, besides the shares claimed to have been issued to them unlawfully.

As general manager, Lofland received a salary of one thousand dollars during the year 1911, and eighteen hundred dollars annually thereafter. His duty was to devote his time and attention to the company. Baylis, Thompson and Lank each received a salary of five hundred dollars a year as treasurer, during their respective terms of office.

The directors voted themselves one thousand dollars each for the year 1912 and one thousand dollars each for the year 1913. For 1914 and also for 1915, they received or were credited with the same amount without vote. On December 18, 1917, when winding up the affairs of the company, the directors voted themselves two thousand dollars each, one thousand dollars for 1916, and a like sum for 1917. The sums so received were paid or credited as salaries or compensation for extra services claimed to have been rendered for the company.

It does not appear from the record that the stockholders authorized, assented to or had knowledge of the action of the directors in paying themselves these amounts. All of the directors received said salaries or compensation, and all were present at the hearing before the Chancellor, but only three testified respecting the payment of the sums mentioned.

On September 18, 1911, the directors issued to themselves ninety shares of stock, full paid and non-assessable, fifteen shares to each, without any money payment therefor. On September 21, 1911, the directors passed a resolution which provided that the directors be voted fifteen shares of stock each for services in organizing the company and commissions for selling its stock.

Dividends were paid on these ninety shares, aggregating sixty per cent. of par, besides a dissolution dividend of one hundred and sixty-five dollars per share, making a total of twenty thousand, two hundred and fifty dollars paid on said shares.

The issuance of this stock was never made known to the stockholders, so far as the record shows, and only three of the directors testified in defense of the issuance of the stock at the hearing before the Chancellor, although all of them were present.

The business of the company was very successful from the beginning, the first season yielding a net profit of twenty-five per cent., and it was decided to increase its capital stock from two thousand to five thousand shares, par value one hundred dollars.

On February 14, 1912, the directors issued seventy shares of stock to each of themselves, four hundred and twenty in all, as full paid and non-assessable, and gave therefor their individual unindorsed promissory notes for the par value of the stock; each giving two notes, one for five thousand dollars due in two years, and one for two thousand dollars payable on demand. The giving of the notes does not appear to have been made known to the other stockholders. The stock was issued and the notes accepted without any corporate action whatever.

Dividends aggregating forty per cent. of par have been paid to the six directors on these four hundred and twenty shares, and also one hundred and sixty-five dollars per share as a dissolution dividend, making a total of eighty-six thousand, one hundred dollars.

The payments made on said notes were as follows: Each of the six directors paid $ 766.66 January 20, 1913; $ 700.00 January 15, 1914; and $ 221.50 December 19, 1917, a total of $ 1,688.16 by each director. The aggregate sum paid in cash being ten thousand, one hundred and twenty-nine dollars. Each of these payments was made after a dividend on the stock was received.

The company was voluntarily dissolved in December, 1917.

In June, 1918, a suit in Chancery was instituted against the directors of the company, alleging various fraudulent acts, and praying for the appointment of a receiver. On February 17, 1919, a receiver was appointed, who filed a bill of complaint in the Court of Chancery in July, 1919. On May 12, 1921, the Chancellor rendered a decree in favor of the complainant, requiring, among other things, defendant directors to account for all moneys received from the company either for services as directors or as dividends on the ninety shares, and the four hundred and twenty shares of stock issued to them as aforesaid. A supplemental decree was rendered, June 4, 1921.

Tunnell, one of the defendants, and directors, during the years 1916 and 1917, has paid the receiver since the decree of the Chancellor, the amounts he received as salary or as compensation for services, and the decision of this court cannot, therefore, affect him.

The assignments of error may be stated as follows:

1. The court erred in that it did not determine and adjudge that the ninety shares of the common capital stock of said Lewes Fisheries Company, issued September 18, 1911, fifteen shares to each of said six appellants, was a valid issue of said shares, and that they were fully paid for by said appellants.

2. The court erred in that it did determine that certain moneys voted to the said seven appellants as compensation for services rendered to said Lewes Fisheries Company during the years 1912, 1913, 1914, 1915, 1916 and 1917, were not valid and lawful payments to the said appellants for services rendered.

3. The court erred in that it did not determine and adjudge that the four hundred and twenty shares of the common capital stock issued February 14, 1912, seventy shares to each of said six appellants, was a valid issue of said shares, and that they were fully paid for by said appellants.

These assignments will be considered in the order in which they were stated.

Neither the charter nor the by-laws of the Lewes Fisheries Company authorized the directors to take salaries or compensation for their services, and, therefore, when they became directors they must have known they were to serve without pay.

All of the six defendants participated in the issuance of the fifteen shares of stock to themselves, and attempted to validate the issue three days later by adopting a resolution directing that they be voted fifteen shares each for services rendered in organizing the company and commissions for selling stock therein.

The appellants claim that by their personal efforts they sold a large amount of stock for the company, and also rendered other valuable services in organizing the company, such as securing a lease of land for the factory, making plans and specifications for the factory and thereby saving the company a large amount of money in architect's fees, supervising the construction of the factory and the boats, and installing machinery, etc. And they further claim that they rendered other extra services, such as going out on the boats frequently to increase catches of fish, obtaining labor at all hours of the day and night, endorsing paper to a large amount, making visits to Milford to hasten the construction of boats, going to Charlestown and other places on business for the company, and also various other services.

In considering the right of directors to receive compensation for services rendered for the company, there are certain general principles of...