National Lock Co. v. Hogland

• Decision Date: 08 February 1939
• Docket Number: No. 6554.,6554.
• Citation: 101 F.2d 576
• Parties: NATIONAL LOCK CO. v. HOGLAND et al.
• Court: U.S. Court of Appeals — Seventh Circuit

101 F.2d 576 (1938)

NATIONAL LOCK CO. v. HOGLAND et al.

No. 6554.

Circuit Court of Appeals, Seventh Circuit.

October 3, 1938.

On Rehearing February 8, 1939.

COPYRIGHT MATERIAL OMITTED

Otis F. Glenn, R. G. Real, and J. Roy Browning, all of Chicago, Ill., and Carl Solomonson, of Rockford, Ill., for appellants.

Floyd E. Thompson, Henry J. Brandt, and Edgar J. Schoen, all of Chicago, Ill., and Karl C. Williams, of Rockford, Ill., and Charles LeRoy Brown, of Chicago, Ill., for appellee.

Before SPARKS, MAJOR, and TREANOR, Circuit Judges.

TREANOR, Circuit Judge.

This appeal arises out of a suit in equity which was filed in the District Court by the National Lock Company, appellee, against Frank G. Hogland, Gust Anderson, as trustee, H. T. Grenberg, and A. J. Strandquist, appellants, and certain other named defendants. The purpose of the suit was to recoup the amount of certain funds which the complaint alleged had been withdrawn unlawfully from the National Lock Company's treasury and appropriated to the personal use of defendant Hogland; the liability of Hogland's co-defendants being predicated upon their alleged aiding and abetting of Hogland in such unlawful appropriation. A decree was rendered below substantially in conformity with plaintiff's prayer.

The plaintiff corporation is organized under and pursuant to the laws of the state of Delaware and the defendants are citizens of the state of Illinois. The defendant Hogland was president of the plaintiff corporation, a member of the Board of Directors and a stockholder during the period of the alleged illegal withdrawals of the corporation's funds. The defendants Grenberg and Strandquist were members of the Board of Directors and stockholders of the plaintiff corporation during the same period. The remaining defendant-appellant, Gust Anderson, was a member of the Board of Directors for a portion of such period and was a stockholder for the entire period. Also Anderson was for the entire period trustee of a trust created by defendant Hogland, the trust fund consisting of Hogland's personal assets to be utilized for the payment of Hogland's personal debts. Certain of the alleged unlawful withdrawals were traced into the Hogland trust assets.

It is undisputed in this cause that funds of the plaintiff corporation were withdrawn from its treasury and transferred to defendant Hogland in the form of loans. These funds were withdrawn with the knowledge of, assent thereto, and under the authorization of all of the defendants who were members of the Board of Trustees of plaintiff corporation. All such transactions were carried on in the state of Illinois and were in violation of the Delaware Corporation Act under which the plaintiff corporation was organized, and of a resolution of the Board of Directors of plaintiff corporation.¹

The trial court held that the Delaware law was applicable and that the conduct of the defendants in respect to the withdrawal of funds of plaintiff corporation constituted a violation of their legal duty to the corporation. It is not contended by defendants that the trial court erred in holding that the Delaware law was applicable.

The alleged illegal withdrawals of funds for the benefit of Hogland commenced on the 2nd day of January, 1929, and continued through the year 1932. Defendants admit that as a result of the advances made to Hogland the amount of $169,129 is due the plaintiff from Hogland.

The trial court by its finding and decree fixed the principal sum due from defendant Hogland in the amount of $470,273.41. In fixing the foregoing sum the court refused to allow as credits three contested items consisting of the following: (1) Bonus credited to Frank G. Hogland on July 17, 1929, — $15,000; (2) bonus credited to Frank G. Hogland December 30, 1929, — $200,000; (3) common stock dividends credited on the account of Frank G. Hogland December 31, 1930, — $65,622.

The special master stated as a conclusion of law that the action of the Board of Directors of the plaintiff corporation in voting the bonuses in question constituted misappropriations of the funds of the corporation and that such misappropriations were unlawful gifts of corporate funds to the defendant Hogland. This conclusion followed the finding of facts relevant thereto and the District Court adopted the finding of facts and the conclusion of law of the Master.

An examination of the evidence compels the conclusion that the evidence was sufficient to support the facts as found, and we are of the opinion that the conclusion of law as stated by the Master, and adopted by the court, is correct.

The evidence justifies the inference that there was no agreement, express or implied, on the part of the corporation to pay the bonuses in question to defendant Hogland, and it was a reasonable inference from the evidence that the purpose of the declaration of the bonuses was to relieve defendant Hogland from his obligation to repay to the corporation the funds which had been advanced unlawfully to him. Neither of the bonuses was paid in cash but was in the form of paper credit on the account of defendant Hogland. The record respecting the $15,000 bonus consists of a voucher without any record authorization in the minutes of a Director's meeting. The voucher bears the date of July 17, 1929, and the amount is the same as the amount of an advance made to the defendant on June 29, 1929. The $200,000 bonus was voted by the Board of Directors on December 26, 1929, and is in the same amount as an advance which was made to the defendant in the preceding June. The $200,000 bonus resolution recited that the matter had been called to the attention of the Board of Directors by a resolution adopted January 29, 1927; that the bonus was being voted "in appreciation of and as a reward for valuable services and efforts made during the past years"; and that the services referred to were those of Hogland "as general manager and as an officer of the corporation."

An examination of the resolutions of the Board of Directors of January 29, 1927, reveals that the services therein referred to related to services in promoting the organization of appellee corporation, and especially for efforts in effectuating the sale of assets of an Illinois corporation to the present Delaware corporation, the plaintiff.

It also appears from the record that in 1928 the Board of Directors of plaintiff corporation caused suit to be instituted in the state court against the present defendant Hogland. In answer to the charge that Hogland had been over-compensated for his services Hogland alleged that the compensation paid him was "fair, reasonable and just for the work and efforts that he gave the corporation in the capacity in which he served." His salary for the year 1924 was $48,000, and for the years 1925, 1926, and 1927 he received $60,000 per annum. While the foregoing suit was pending a new Board of Directors was elected, and this Board approved a settlement of the suit by payment of $100 to the corporation by Hogland. A decree of court was entered May 23, 1929, which approved and confirmed the compromise and settlement; and in respect to the question of compensation for services, the decree recited that "the services of the defendant, Hogland, during the time he was paid a salary of $48,000 per year, were of the reasonable value of $48,000 per year, and during the time he was paid a salary of $60,000 per year his services were of the value to the said corporation of said $60,000 per year."

The foregoing tends to discredit the recital in the bonus resolution that the payment of bonus was "in appreciation of and as a reward for valuable services and efforts made during the past years." And while defendants urge that services during the year 1929 are comprehended by "past years" the minutes of the Board of Directors disclose that at the same meeting at which defendant Hogland was voted a bonus of $200,000 for services and efforts made during the "past years" the Board took special notice of his services for the year 1929 by voting a retroactive salary increase of $18,000 for the year 1929.

Also it appears from the record that the same directors who voted to advance the $200,000 to defendant Hogland in June also voted to pay him the bonus of $200,000 in the meeting of December 26, 1929. Since the Directors who participated in the unlawful appropriation of corporate funds were legally responsible for the repayment of the same, they voted for cancellation of their liability, if at the time of the voting of the bonus they understood it was to be credited to defendant Hogland's account. Regardless of whether, as plaintiff contends, the Directors were barred, because of their interest, from participating in the bonus action, at least the trial court could not ignore the unusual situation in determining whether or not the resolution to pay the bonus represented a good faith payment for services to the corporation; or whether it was merely a fraudulent device to avoid the legal consequences of the unlawful advances to defendant Hogland.

The Special Master found that during the period covered by the transactions involved in this cause the defendant, Frank G. Hogland, to a large extent, directed the affairs and activities of the plaintiff corporation. The Board of Directors for the year 1929 was "favorable" to Mr. Hogland, and although from and after January 1, 1930, defendant Gust Anderson, as trustee of the Hogland Trust, owned a majority of the stock of National Lock Company, the evidence discloses that such stock was voted by defendant Frank G. Hogland. It is necessary for this court to recognize that the evidence was sufficient to justify the trial court's concluding that the defendant Frank G. Hogland, with the aid and cooperation of his co-defendants, controlled the affairs of the National Lock Corporation throughout the period during which the transactions which were material to this cause took place. Also the...