Lydia E. Pinkham Med. Co. v. Gove

• Decision Date: 14 April 1939
• Citation: 20 N.E.2d 482,303 Mass. 1
• Parties: LYDIA E. PINKHAM MEDICINE CO. v. GOVE et al.
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

303 Mass. 1

20 N.E.2d 482

LYDIA E. PINKHAM MEDICINE CO.

v.GOVE et al.

Supreme Judicial Court of Massachusetts, Essex.

April 14, 1939.

Reservation and Report from Supreme Judicial Court, Essex County.

Suit by Lydia E. Pinkham Medicine Company against Aroline P. Gove and others for damages and injunctive relief predicated on breaches of trust by defendants as directors and officers of plaintiff corporation. On reservation and report.

Decree for plaintiff in part in accordance with opinion. J. W. Worthen and E. B. Cook, both of Boston, for plaintiff.

L. Withington and J. S. McCann, both of Boston, for defendants.

QUA, Justice.

When this suit came before the full court upon a previous occasion (Lydia E. Pinkham Medicine Co. v. Gove, Mass., 9 N.E.2d 573) we held that no error had been shown in overruling the defendants' demurrer to the bill and the defendants' plea; that the defendants' exceptions to the master's first report must be overruled; that the plaintiff was entitled to injunctive relief and to damages and costs against the defendants Aroline P. Gove and Lydia P. Gove; that the bill should be dismissed as to the defendant Renehan, with costs to her; and that upon the entering of the final decree the temporary injunction restraining the defendants Gove from further prosecuting their suit in Maine for the appointment of a receiver of the plaintiff should be dissolved. We then stated in substance that further hearings upon various matters would be necessary before the details of a final decree could be settled and ordered the case to stand for further proceedings in the county court.

Thereafter the cause was recommitted to the master for further findings of fact, and both his first report and his supplemental report have been confirmed. A stipulation on file discloses that some of the grievances of which the plaintiff complained have been remedied, and certain sums have been paid to the plaintiff by the defendants Gove. Other issues remain to be determined, including that raised by the contention of the plaintiff, added by amendment to the bill since the former opinion, to the effect that the defendants Gove have been guilty of such breaches of trust as officers of the plaintiff that they have forfeited their right to retain the salaries paid to them by the plaintiff since January 1, 1933. We shall deal in turn with the several questions remaining, beginning with that introduced by the amendment.

1. The fiduciary relation of a general corporate officer to the corporation whose affairs are in part at least intrusted to his care is universally recognized. Lydia E. Pinkham Medicine Co. v. Gove, Mass., 9 N.E.2d 573, and cases cited. A trustee who commits a breach of trust or an agent who is guilty of disloyal conduct thereby imperils his right to compensation. Quinn v. Burton, 195 Mass. 277, 279, 81 N.E. 257;Little v. Phipps, 208 Mass. 331, 333, 334, 94 N.E. 260, 34 L.R.A.,N.S., 1046; Lamdin v. Broadway Surface Advertising Corp., 272 N.Y. 133, 5 N.E.2d 66. There are cases in which this principle has been applied to deny all salary to officers of corporations whose official acts have been tainted with bad faith. Eaton v. Robinson, 19 R.I. 146, 31 A. 1058,32 A. 339,29 L.R.A. 100;Hinkley v. Sagemiller, 191 Wis. 512, 210 N.W. 839;Munro v. Smith, 1 Cir., 259 F. 1, 21, 22;Backus v. Finkelstein, D.C., 23 F.2d 357, 360, 361;Flint River Pecan Co. v. Fry, 5 Cir., 29 F.2d 457, 459. The plaintiff makes a strong argument for its application in this case. But the rule is not an inflexible one. Each case must be determined in the discretion of the court with reference to the peculiar factors found to be present. Although pure considerations of public policy have no doubt weighed heavily against fiduciaries who have placed selfish interest above duty, yet the American Law Institute finds the basis for refusal of compensation to a trustee, not in the theory of a penalty, but in the theory that payment is not due for services not properly performed. Am.Law Inst.Restatement: Trusts, § 243, Comment a. Apparently upon similar reasoning, a disloyal agent may have compensation which is ‘apportioned’ by the contract of employment to services properly performed. Am.Law Inst.Restatement: Agency, §§ 456, 469.

One of the peculiar factors in the present case is that the salaries paid to officers were not compensation for services in the ordinary sense at all. They were governed by this provision of the by-laws: ‘Such compensation and salaries shall be so adjusted and apportioned that there shall be an equality between the aggregate salaries received by officers of the company who are the holders of Gove stock and the aggregate salaries received by officers of the company who are holders of Pinkham stock.’ It was further provided that the compensation or salaries of Gove officers should be apportioned among them by vote of the Gove directors; that the compensation or salaries of Pinkham officers should be apportioned among them by Pinkham directors; and that, unless the full board of directors voted otherwise unanimously, the aggregate compensation and salaries of officers holding each class of stock should not be less than $20,000 per annum. For many years these or somewhat similar provisions have been in effect. Their obvious purpose is to insure to each of the two family factions between which the ownership and control of the plaintiff corporation are divided an equal share in that part of the corporate distributions which is paid out under the disignation of compensation or salary, just as the equal division of the stock insures an equal share in the dividends. These provisions were also, no doubt, intended to secure to each faction a minimum annual income from the business not subject to the variations attending the receipt of dividends. The defendant Aroline P. Gove is a woman over eighty years of age. She is a daughter of the original founder of the business. She is treasurer of the plaintiff and as such receives a salary of $20,000 per year. She relies upon the decisions of her daughter, the defendant Lydia P. Gove. The latter is active, entergetic, and dominating. She receives $7,000 a year as assistant treasurer. Each receives $1,000 a year additional as a director. It is hardly possible that these several sums bear or were intended to bear any genuine relation to compensation for services rendered.

Another factor entitled to some consideration is that at no time did the president, who belonged to the Pinkham faction, and who under a vote of the directors passed June 7, 1927, had the powers of a general manager (Lydia E. Pinkham Medicine Co. v. Gove, Mass., 9 N.E.2d 573), or the directors,or any person connected with the company, object formally or informally to, or protest against, the continued payment of these salaries, and no specific claim of the right to recover them was made until after the former decision of this court. Although it is true that a protest might have been useless, and that failure to protest might not amount to a waiver of the rights of the plaintiff, yet it seems to us that such long and complete silence upon the matter of salaries by all parties interested amid the din of conflict over so many other matters is not wholly without significance as confirmatory proof that the salary payments were something other than ‘compensation’ for ‘services' rendered in bad faith.

On the whole, while admitting the force of contrary considerations, and with some hesitation we think that, in this case, to require the defendants Gove to repay to the plaintiff salaries received over an entire period of between five and six years, amounting at the date of the filing of the amendment to more than $150,000, without including interest, would be more nearly analogous to the deprivation of property rights incident to the holding of Gove stock than to the restitution of money wrongfully obtained for faithless services; that it would be in conflict with the true theory upon which a fiduciary who has been guilty of breach of trust should be required to surrender his compensation; and that it would, in effect, be imposing upon these defendants a penalty disproportionately harsh under all the circumstances.

In Daniels v. Briggs, 279 Mass. 87, 180 N.E. 717, an officer of a corporation was allowed his salary up to a reasonable amount, although he had issued a stock certificate to himself in a transaction described as ‘tainted,’ and in Sagalyn v. Meekins, Packard & Wheat, Inc., 290 Mass. 434, 195 N.E. 769, directors were deprived only of the excess of salary received above the fair value of their services, although they had been guilty of a breach of fiduciary duty for personal profit and not merely of an error of judgment. 290 Mass. page 439, 195 N.E. 769. See Meyer v. Fort Hill Engraving Co. 249 Mass. 302, 143 N.E. 915;Stratis v. Andreson, 254 Mass. 536, 150 N.E. 832, 44 A.L.R. 567.

2. The plaintiff is not entitled to recover from the defendants Gove a sum of approximately $248,000 which it contends was a loss suffered by it because of the Goves' insistence in bad faith upon excessive expenditures for advertising in the years 1933 and 1934. The master reports as to those years that ‘Notwithstanding the fact that the sales were greater in 1933 and 1934 than they had been in 1931 and 1932, when the company made large profits, the company lost money, as it had done in 1930 [when also there were large expenditures for advertising], losing $99,412.11 in 1933 and $148,983.58 in 1934,’ and that ‘In 1933 and 1934, upon the insistence of Lydia Gove, larger amounts were again spent on advertising, causing large deficits for those years, yet the sales for 1935 were less than they had been for any year since 1917.’ It is hard to construe these statements as equivalent to a finding that the sums mentioned were permanently lost in their entirety. Such a construction assumes that moneys expended in the years 1933 and 1934 had no...