Ransome Concrete Machinery Co. v. Moody

• Decision Date: 20 March 1922
• Docket Number: 199.
• Citation: 282 F. 29
• Parties: RANSOME CONCRETE MACHINERY CO. v. MOODY.
• Court: U.S. Court of Appeals — Second Circuit

282 F. 29

RANSOME CONCRETE MACHINERY CO. v. MOODY.

No. 199.

United States Court of Appeals, Second Circuit.

March 20, 1922

[Copyrighted Material Omitted]

Where one wrongfully discharged from his employment as general manager of a corporation did not intend to seek salaried employment, but was seeking an opportunity to enter a business or found one as a partner, or its equivalent, he was entitled to a reasonable time to seek and find or make the business that he wanted.

Plaintiff's business apparently consisted in the manufacture of concrete machinery. The contract in question provided for defendant's employment as general manager for a period of six years at a salary of $10,000 a year and percentages of the net profits, ranging from 5 per cent. on profits above $20,000 to and including $30,000 to 20 per cent. of the net profits above $80,000.

The following is the opinion of Hough, Circuit Judge, delivered in the court below, and hereinafter referred to:

The structure of this bill is so simple and the facts (in the primary sense of things done, said, or written) so fully admitted or proven, that no elaborate fact findings are thought necessary. It is sufficient to state that I regard the bill as one falling under a well-known head of equity jurisdiction, viz. to set aside a contract obtained by fraud or attempted to be made ultra vires (as matter of form, it makes no difference which), and obtain an accounting for moneys procured by defendant under color and cover of said contract. But, while the facts are practically admitted, the inferences from them are seriously in dispute, and for this reason I note as separate findings the inferences drawn by me.

(1) Owing to the long continuance in office of more than three directors of plaintiff company, not only Moody, but all other persons concerned in the transaction complained of, were well warranted (entirely apart from all other considerations) in believing the board of seven directors to be fully authorized to act in all corporate matters properly cognizable by any board of directors. This tends to negative all actual fraud.

(2) There is no proof of any mutual understanding or agreement between Moody and Robinson, whereby each of them or either of them agreed beforehand to vote for the other man's contract, in consideration of a like vote by that other.

(3) At no time was there any actual fraud worked on the plaintiff by any action of any board of directors in increasing their own number, and their action was subsequently ratified by the shareholders. For many years before October, 1919, seven directors were the expressed and recorded wish of the stockholders of plaintiff's corporation.

(4) As an inference or conclusion of law, it is held that, after the stockholders' ratification at the latest, the plaintiff company was estopped from questioning or denying the acts of the seven directors, or of a quorum thereof, except for fraud or other malfeasance in office. That such estoppel may not have extended to the state of New York as the creator of the corporation is here immaterial.

(5) While the mere amount of a promised compensation may be so excessive as to be evidence of fraud, the method and quantum of the promised payment to Moody, having regard to the volume and nature of the plaintiff's business, was so clearly within the business discretion of plaintiff's board of directors that it must be held that there was no wrong fraud, or malfeasance per se in promising to pay to Moody, or to pay to both Moody and Robinson, the amounts agreed upon in the contracts of October, 1919.

(6) In respect to so much of its alleged cause of action as rests on the legal incapacity of the plaintiff through or by a quorum of its directors to make the contract in suit, the plaintiff is not guilty of laches. In respect, however, of all allegations of actual or constructive fraud, or of moral turpitude, on the part of the defendant or other directors, as there is no proof of the same, inquiry into laches is immaterial.

The foregoing findings sufficiently show that in my opinion this case is to be considered as if the seven men who honestly believed themselves directors of plaintiff in 1919, and who were honestly believed to be directors by the shareholders of the company, were in office both de jure and de facto. Thus the questions in the case become these:

(a) Could the board vote to one or more of their number largely increased compensation?

(b) Could the board make such compensation retroactive? and (c) Is the contract of October 31, 1919, invalidated by the bald fact that without Robinson's vote, Moody's contract could not exist, and without Moody's vote Robinson's contract would not have been given?

On these questions, I hold as matter of fact and conclusions of law:

I further find as a fact that Steele honestly regarded this plan as the best for the welfare of the company and for his own interests as a shareholder. He was doubtless irritated by the Smith refusal to expedite the original plan of practical reincorporation, and by Mr. Smith's apparent refusal to meet and confer with him (Steele). He was determined to retain Moody and Robinson in the service, some such plan of increased remuneration was necessary to effect this result, and he (Steele) adopted and pushed through the plan, scheme, and contract now complained of. It is admittedly true that Moody expected Robinson to vote for the former's contract and e converso; but such expectation rested, not upon any agreement, corrupt or otherwise, between these two men, but on the controlling fact that Steele, whom they both properly regarded as the head and chief of the corporation, had approved these two contracts, and Moody and Robinson depended upon Steele, and not upon each other, to carry through what were practically their bargains with Steele.

(9) As a conclusion of law it is prima facie within the power of the president of a corporation existing under the law of New York to make any contract on behalf of the company which the directors of the company would have power to make by vote of the board; and the burden is on one who impeaches the president's authority. Such burden has not been borne in this case in respect of Mr. Moody's increase in salary, which increase was actually made by Steele as president not later than March, 1919, and which had been the subject of consideration by Steele, who had expressed favorable view thereof for some months previous; i.e., considerably before January 1, 1919.

(10) As a finding of fact it is my opinion that, regarding the history of this concern so far as we deal in evidence, the nature of its business, and the paucity of profits to and including 1918, it was a good business plan and one necessary for the growth of the corporate enterprise to attract and hold for a term of years skillful and vigorous managers, by making their compensation largely dependent upon an increase in business which they were themselves relied upon to bring about.

It is true (and cognizance is taken thereof) that the years 1918-1919 were years of war, and that the product of this company was in governmental demand; but, even so, the enormous increase in the company's business and profits for 1919-1920 is strong evidence justifying (in a business way) the Moody-Robinson contracts. Thus the case narrows to inquiry whether, with honesty all around, with all the men concerned acting, not only without fraud, but in the exercise of a sound business discretion, what was done (or any part thereof) is so opposed to settled law as to require a declaration of nullity on the part of a chancellor. I do not think that a trial court is often the place for exhaustive discussion of cases; it is sufficient to indicate the view of the law entertained by the trial judge, and I shall do this as follows:

All discussion concerning de facto and de jure directors is beside the mark. Doubtless the law is as laid down in Matter of Ringler, 204 N.Y. 30, 97 N.E. 593, Ann. Cas. 1913C, 1036; but this plaintiff, by its stockholders' action, is estopped from asserting this particular variety of act ultra vires. That the relation of a director to his corporation is that of a fiduciary is undoubted (Jacobson v. Brooklyn, etc., Co., 184 N.Y. 152, 76 N.E. 1075); and it is equally clear that all contracts made by boards of directors with one of their own number, or indeed with any 'insider' (to speak colloquially), are closely scrutinized in equity, and frequently overturned, when, if made with strangers, they would be far more liberally viewed.

It is not without interest to note that the leading cases (such as Godley v. Crandall, 212 N.Y. 121, 105 N.E. 818, L.R.A. 1915D, 632) on this point are brought by minority shareholders; whereas, this action is brought by the corporation itself. The minority holder is in the nature of things not estopped by corporate action in which he did not join; whereas, this corporation, and more particularly the Smith majority therein, is thoroughly estopped as to the illegality of the seven-director board. This point, however, does not affect the right of the corporation to complain of a contract obtained by actual or constructive fraud.

The bill primarily rests on the theory that all the acts of the directors of 1919 were null, because there never was any legal board after the stockholders assumed to create more than three directors. The corporation, by the action of its shareholders, is estopped from asserting or maintaining this position. Thus the primary object of the bill fails; but there are sufficient allegations therein to require an answer to the question whether, in making the arrangements that were made with Moody and Robinson, the majority of the board of directors were or...