Rafferty v. Donnelly

• Decision Date: 08 October 1900
• Docket Number: 187
• Citation: 197 Pa. 423,47 A. 202
• Parties: Rafferty v. Donnelly
• Court: Pennsylvania Supreme Court

47 A. 202

197 Pa. 423

Rafferty v. Donnelly

No. 187

Supreme Court of Pennsylvania

October 8, 1900

Argued February 27, 1900

Appeal, No. 187, Oct. T., 1899, by plaintiff, from decree of C.P. No. 1, Allegheny Co., June T., 1897, No. 126, on bill in equity, in case of Gilbert T. Rafferty v. Charles Donnelly et al. Affirmed.

Bill in equity for an account.

The case was referred to J. M. Swearingen, Esq., as referee, who reported in favor of the defendant.

Exceptions to the referee's report were dismissed, the court filing the following opinion, from which the facts appear:

The plaintiff's bill after stating the incorporation of the McClure Coke Company, the amount of its stock and the number of shares owned by the several stockholders, states that by the by-laws of the corporation it was provided that the officers should consist of a president, two vice presidents a secretary and treasurer and a board of directors consisting of three persons, who were to be elected annually etc., and that by a resolution of the stockholders, approved by the board of directors, it had previous to the action of the board, which is the foundation of plaintiff's complaint, resolved, that the president of said corporation should receive a yearly salary of $5,000; that each of the vice presidents should receive a salary of $5,000 per annum, and the secretary a salary of $2,000 per annum. That for years prior to April 7, 1895, Gilbert T. Rafferty had been president of said corporation, Charles Donnelly and B. H. Ruby had been vice presidents, and for some time prior to said date James Adair had been secretary and treasurer, and the plaintiff, Gilbert T. Rafferty, Charles Donnelly and B. H. Ruby had been the directors of said corporation. And that during the time said officers held their said positions, the salaries provided for as above mentioned had been fully paid them.

That on May 2, 1895, a meeting of the board of directors of said corporation was held, at which Charles Donnelly and B. H. Ruby were present (the plaintiff being then absent from the state of Pennsylvania and having no knowledge of the purpose of said meeting) and that Donnelly and Ruby assuming to be a quorum of the board of directors, caused to be passed the following resolution: Resolved, that before the next annual meeting of the company and closing of the books for the current fiscal year, an adjustment of certain salaries, some time in contemplation, shall be made in favor of the company's vice presidents, upon whom has devolved the responsible, continuous management of the business of the company, and that anterior to and during the four fiscal years ended May 1, 1895, and to effect and complete this adjustment additional salary credits shall be made as follows: to the account of Charles Donnelly $40,000, to the account of B. H. Ruby, $10,000, thus making their total compensation respectively $15,000 and $7,500 per annum during the years named to May 1, 1895, and that afterwards on May 29, 1895, a meeting of the stockholders was held at which all the defendants except B. H. Ruby were present, but at which plaintiff was not present, and at said meeting the action of the said directors, Donnelly and Ruby, was reported and approved by the unanimous vote of the stockholders present at said meeting, and at the same meeting the salary of James Adair, which had been previously fixed at $2,000 per annum, was raised to $250 per month, dating the same back to January 1, 1895.

That plaintiff was absent from this state during all the time covered by these transactions, and at no time prior to or during his absence did he have any information from defendants or any of them of their intention to pass said resolution and appropriate to themselves the several sums of money hereinbefore mentioned. And that afterwards, October 1, 1895, Wm. P. Snyder acting for Donnelly and the other defendants, by false and fraudulent representations procured a contract from plaintiff whereby he was to sell to said Snyder all his stock in said company at a price based upon the existing assets, debts and liabilities of said company, and thereupon plaintiff transferred his stock to the H.C. Frick Company, and the acts complained of did not come to his knowledge until about November 2, 1896, whereupon he demanded the defendant should make good to him his proportionate share of said money thus fraudulently abstracted by them from the treasury of said company.

The fact of the increase of salaries as alleged by plaintiff is not controverted, and it is not pretended that he was present or had information that it was to be made previous to the action of the board, and therefore so far as plaintiff was concerned it was illegal and void, and he has a right by this proceeding in equity to have his proper proportion of the moneys thus received by Ruby, Donnelly and Adair restored to him, unless defendants can show some good and sufficient reason to the contrary. We can see no cause of action against the McClure Company, but the case is different as to Ruby, Donnelly and Adair. If plaintiff's contention is true, they without legal right got some $50,000 out of the treasury of the company, a portion of which belonged to the plaintiff.

Without going into any particular examination of the multitudinous exceptions filed to the report of the referee, in our opinion the whole question hangs upon the fact whether or not the plaintiff had knowledge of the action of the board and expressly or impliedly assented thereto before or at the time he disposed of his stock.

As was said in Brown v. De Young by the Superior Court of Illinois in a somewhat similar case, "the payment of such a salary was not an unlawful act and void because it was ultra vires the corporation, but was unjustifiable and voidable because not authorized as against any innocent stockholder who was thereby injured," and whether this appropriation of the company's money was done (as alleged by plaintiff) with an actual fraudulent intent or not, if done without his knowledge or consent, it was in its effect a legal fraud so far as his rights as a stockholder were concerned, such as will enable him to avoid the act to that extent.

It will be observed that plaintiff's bill alleges that defendants "fraudulently and illegally assumed the right to appropriate," etc., and "that in pursuance of the illegal and fraudulent action aforesaid defendants, Donnelly,...