Matthews v. Headley Chocolate Co.
| Decision Date | 13 March 1917 |
| Docket Number | 30. |
| Parties | MATTHEWS et al. v. HEADLEY CHOCOLATE CO. |
| Court | Maryland Court of Appeals |
Appeal from Circuit Court No. 2 of Baltimore City; Carroll T. Bond Judge.
"To be officially reported."
Bill by the Headley Chocolate Company against Henry W. Matthews and others. From an order overruling defendants' demurrers they appeal. Order affirmed, and cause remanded for further proceedings.
Argued before BOYD, C.J., and BRISCOE, BURKE, THOMAS, PATTISON URNER, STOCKBRIDGE, and CONSTABLE, JJ.
Randolph Barton, Jr., and John Philip Hill, both of Baltimore (F. J Kintner and Forrest Bramble, both of Baltimore, on the brief), for appellants.
Jacob M. Moses and Vernon Cook, both of Baltimore, for appellee.
A bill in equity was filed in the name of the Headley Chocolate Company against its former directors, and, demurrers to that bill having been sustained, an amended bill was filed. One of the seven directors (Frank O. Headley) was president, and another (Henry W. Matthews) was vice president, treasurer, and secretary of the company. Henry W. Matthews, C. Jacob Youse, Thomas E. Fluharty, and Henry C. Suchting, being residents of the state, were served with process, and the other three, Charles E. Matthews, George W. Kurtz, and Frank O. Headley, being nonresidents, were not summoned. Each of the four who were summoned filed a demurrer to the amended bill, and, the demurrers being overruled, appeals were taken by each, but they were argued together and were properly treated as one appeal.
The corporation was organized in this state in 1900, and is engaged in manufacturing, selling, and otherwise dealing in high-grade chocolates, candies, and similar products. The capital was originally $20,000, but several amendments were made, and in 1902 it was increased to $100,000, consisting of 300 shares of preferred and 700 of common stock. The preferred stock carries a guaranteed dividend of 10 per cent. per annum, but has no voting power. The amended bill alleges that some time prior to the year 1908 Henry W. Matthews and Frank O. Headley owned and controlled a majority of the common stock, and that at a meeting of the stockholders, held January 14, 1908, they, operating together, determined not to reelect the old board of directors, but to elect a board "composed of themselves and the other defendants hereinbefore mentioned, all of whom were known to be subservient to the wishes of the defendants Henry W. Matthews and Frank O. Headley, and known to be persons who would not oppose the plan which the defendants Henry W. Matthews and Frank O. Headley then had in mind of voting to themselves excessive salaries and compensation, the amount of which will be hereafter more fully set forth." It is then alleged that Charles E. Matthews, who is a brother of Henry W., owns 6 shares, that George W. Kurtz, who is the father-in-law of Headley, owned 7 shares, that Youse who owned 12, Fluharty, who owned 3, and Suchting, who owned 7 shares, were engaged in businesses therein set out, and that the continuance of their business relations with the company depended upon the will of Henry W. Matthews and Frank O. Headley, who controlled the buying of supplies; that an inventory recently taken of the assets of the corporation shows that it had on hand boxes and labels purchased from those three defendants to the extent of $40,000, very largely in excess of any need of the company; that the excessive purchases were made in most cases at prices in excess of the fair market price, and were made by Matthews and Headley with the fraudulent purpose of inducing Youse, Fluharty, and Suchting to become parties to the fraud, and that they actually aided and co-operated with Matthews and Headley to perpetrate and accomplish the said frauds.
It is alleged that just prior to the election in 1908, Henry W. Matthews and Frank O. Headley were each in receipt of a salary of $6,000 per annum, and the first act of the board was to increase Headley's salary to $10,000, and that of Matthews to $12,000, "although their duties and the work and labor which devolved upon them were not in any way increased at that time." It is further alleged that salaries were allowed as follows: To Headley, $10,000 for 1909, $12,000 for 1910, $16,000 for 1911 and 1912, each, $5,333 for 1913, $6,000 for 1914, and $1,800 for 1915, and to Matthews, $12,000 for 1909, $16,000 for 1910, $30,000 for 1911 and 1912, each, $10,000 for 1913, and $12,000 for 1914 and 1915, each.
At the meeting of the directors held December 31, 1910, a resolution was passed allowing Matthews extra compensation of $16,000 and Headley $6,000 "for their good and valuable services rendered the company during the last year." The bill shows that a dividend of 50 per cent. was declared in each of the years 1910 and 1911, 10 per cent. in 1912 and 1913, 6 per cent. in 1914, and that none was declared in 1915. In November, 1915, a controlling interest in the stock of the corporation was sold to R. E. Rodda, of Lancaster, Pa., and "certain associates," by Henry W. Matthews. In January, 1916, a board of directors and new officers were elected, and none of the former board were continued. The original bill was filed on the 27th of January, 1916. It is also alleged that about the 1st of May, 1913, Henry W. Matthews purchased valuable property in Baltimore city, which is described in the bill, and that a considerable portion of the money wrongfully paid from the treasury of the company to him was used in the purchase; that Headley is a nonresident of the state, and has no property here except 98 shares of the company's stock; and that Kurtz has nothing here except 53 shares of this stock; and the bill prays that they be enjoined from selling, incumbering, or in any way disposing of their respective properties. It further prays that the defendants be required to account for and repay to the plaintiff the sum of $16,000 paid Matthews, and the sum of $6,000 paid Headley on December 31, 1910, with interest, and that the court may by its decree declare that the salaries of Matthews and Headley for the years 1908, 1909, 1910, 1911, 1912, 1913, 1914, and 1915, and each of them were greatly excessive, and that the defendants, and each of them, be required to account to and pay to the plaintiff all sums paid to Matthews and Headley as salaries in excess of such sum, if any, which the court may find they are fairly entitled to receive for their services, with interest.
One of the most important questions presented for our consideration is whether under the circumstances the bill in equity can be maintained in the name of the corporation. It is not denied by the appellants that if the facts be as alleged in the bill, minority stockholders, unless barred in some way, would be entitled to relief, but they contend that the corporation cannot properly sue under the circumstances. They do not claim that the general rule is that a corporation cannot proceed in equity to obtain redress for illegal, fraudulent, ultra vires, or grossly negligent acts of its directors and officers, and that could not well be claimed, for without quoting from them the cases of Booth v. Robinson, 55 Md. 419, Emerson v. Gaither, 103 Md. 564, 64 A. 26, 8 L. R. A. (N. S.) 738, 7 Ann. Cas. 1114, Murphy v. Penniman, 105 Md. 452, 66 A. 452, 121 Am. St. Rep. 583, Thomas v. Penniman, 105 Md. 475, 66 A. 291, Gaither v. Bauernschmidt, 108 Md. 1, 69 A. 425, and others which might be cited, establish the right of a corporation to proceed in equity in such cases. But the question whether a bill can be maintained in the name of the corporation under such circumstances as are here alleged to exist has not been definitely determined by this court. It is not alleged that the corporate stock of the company has been in any way impaired, that any creditors have suffered or are in danger of suffering any loss by reason of the alleged acts of the defendants, nor are any facts alleged which show that any one has been or could be injured more than he would have been if the money had been distributed in dividends which the directors could have legally and properly done, so far as the bill discloses, unless it be those who were minority stockholders at the times of the transactions. It is shown that after all the acts complained of Henry W. Matthews, who was one of the two officers and directors that received the money alleged to have been fraudulently and illegally paid (nearly two-thirds of it having been paid to him), transferred a controlling interest in the company to those who are now claimed to be prosecuting this case in the name of the company, although it is not alleged that they did not get exactly what they bargained for, or that they were in any way imposed on by Matthews.
The bill is peculiar in several respects, but particularly in the fact that it is not shown how many shares of stock were owned by the defendants, or how many by minority stockholders, or indeed how many Matthews sold, except that it was a controlling interest. It is not in terms alleged that there were any minority stockholders, outside of some of the defendants, but it does in several places speak of "minority stockholders," and it may be inferred that there were some, other than the defendants, who held shares, although, as far as the bill shows, they may have had 2, 200, or more. As it is not alleged that the books of the company are not in its possession, the court should have been informed as to how the stock was held, for although the authorities are not uniform on the subject, we can have no doubt that if the holders of all the shares of stock assented to such payments to the officers as are here complained of and a controlling interest in the company was afterwards...
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