Seitz v. Michel, 22089.

• Decision Date: 14 January 1921
• Docket Number: No. 22089.,22089.
• Citation: 148 Minn. 80,181 N.W. 102
• Court: Minnesota Supreme Court
• Parties: SEITZ v. MICHEL.

148 Minn. 80

181 N.W. 102

SEITZ

v.MICHEL.

No. 22089.

Supreme Court of Minnesota.

Jan. 14, 1921.

Appeal from District Court, Ramsey County; James C. Michael, Judge.

Action by Ernest J. Seitz against Theodore Michel. From a judgment for defendant on the pleadings, plaintiff appeals. Affirmed.

Syllabus by the Court

Public policy will not permit a copartnership to do business in the guise of a corporation, nor allow the partners to be a corporation as to the rest of the world while as between themselves the enterprise conducted in the corporation form is in fact a joint venture.

A contract which is contrary to public policy cannot be validated by acts of the parties in recognition of its validity. Neither is estopped from questioning it because the other has parted with property or rendered services in reliance upon it.

A contract in which defendant ‘guaranteed’ that as long as plaintiff lived he should share in the management of certain corporations in which both were stockholders and directors, and that he would furnish him with employment by such corporations, is contrary to public policy. It was an attempt to bargain away in advance the independent judgment which defendant was bound to exercise in casting his vote as a stockholder and director so as to best conserve the interests of the corporations and the entire body of their stockholders.

The consent of all the stockholders to a contract between the two principal ones, intended to permit them to obtain the benefits of using the corporate form in carrying on their business enterprises, while remaining copartners as between themselves, does not remove the objection that the contract is against public policy.

A stockholder cannot maintain an individual action against an officer of the corporation for consequential damages for the improper diversion of corporate funds. The right of action is in the corporation. If the corporation is controlled by the guilty officer, a stockholder may sue, but must bring his action in a representative capacity to have the funds restored to the corporation for the benefit of all the stockholders. H. E. Fryberger, of Minneapolis, and Butler, Mitchell & Doherty, of St. Paul, for appellant.

O. E. Holman, of St. Paul, for respondent.

LEES, C.

Defendant moved for judgment on the pleadings. The motion was granted, and plaintiff appeals from the judgment.

Though not separately pleaded as such, the complaint embraces two causes of action. With respect to the first, it alleges that the parties were partners from 1891 to 1892, when they organized a Minnesota corporation called the Union Brass & Metal Manufacturing Company to take over their business. In February, 1914, plaintiff owned 469 shares of its stock; defendant, 1,344 shares; and there were eight other stockholders owning 78 shares. Defendant was president and plaintiff secretary of the corporation. From 1892 to 1914 the business was managed jointly by plaintiff and defendant. When the Brass Company was incorporated, they mutually agreed that the business to be conducted by the corporation should be in the nature of a joint venture on their part, defendant's interest to be considerably larger than plaintiff's, and the stock was accordingly issued to them in proportion to their several interests. The venture was to continue during the lifetime of the plaintiff. He was to devote his entire time and energy to building up the business. Defendant was to furnish him with employment for life in the enterprise in which they thus engaged and agreed that so long as he was able to render services he should he paid the reasonable value thereof. He also agreed that he would not sell his stock or interest in the business to any one without first offering it to plaintiff; that he would protect plaintiff's rights as a minority stockholder; that plaintiff should always share in the management of the company, which, though nominally a corporation, should be in fact as between plaintiff and defendant a joint venture, they occupying the relation of copartners.

Thereafter plaintiff and defendant were instrumental in organizing four more Minnesota corporations, viz. the Central Supply Company; Elite Laundry Company; Capitol Steam Laundry; and Banner Laundry Company. In each of these corporations defendant was a majority and plaintiff a minority stockholder, and in each a small number of shares were divided among employees. The agreement made when the Brass Company was organized was extended to each of the other corporations when they were organized. Up to February 14, 1914, plaintiff gave all his time and energy to the development of the business of the corporations. On that day, at the annual meeting of the stockholders, defendant, holding a majority of the stock, voted it for stockholders other than plaintiff as directors, thus ousting him from the management of the corporations, and also caused his discharge as manager, assistant manager, or employee of the corporations, and has ever since continued to repudiate the contract between them. Plaintiff's services to the several corporations would have been reasonably worth $10,000 per annum. By depriving him of employment and office, defendant has damaged plaintiff in the sum of $50,000.

With respect to the second cause of action, the complaint alleges that after February, 1914, defendant entered upon a course of conduct planned to eat up the surplus and profits of the corporations. In carrying out this plan, he allowed himself exorbitant salaries, while rendering only nominal services. In some of the corporations he provided for the payment of an excessive salary to his son, and has also paid him a bonus out of the surplus profits of the business. He has placed his brother on the pay roll at a substantial salary, although his services are merely nominal. He has caused favored employees to be paid excessive wages. He owns the building occupied by one of the laundry companies and exacts an excessive rental. He is running the corporations for the benefit of members of his family. He refuses to sell his stock or buy plaintiff's, although plaintiff is willing to have the price fixed by disinterested third persons. Defendant's misconduct has reduced the value of plaintiff's interest in the corporations from $222,000 to $87,000, and damaged him in the sum of $135,000. The demand for judgment upon the two causes of action was $185,000.

Defendant answered and plaintiff replied. Then followed the motion for judgment. After it was granted, plaintiff moved to amend his complaint by alleging that the stockholders of the several corporations had notice of the terms of his contract with defendant, acquiesced therein, accepted its benefits, and were estopped from questioning its validity. Affidavits were read in support of and in opposition to the motion, which was denied.

1. Defendant questions the validity of the alleged contract, asserting that no right of action can be founded upon it. His first point is that the contract is void because public policy will not permit a copartnership to masquerade in the guise of a corporation. The opinion in Jackson v. Hooper, 76 N. J. Eq. 592, 75 Atl. 568,27 L. R. A. (N. S.) 658, contains a full discussion of the point. The court said:

‘The law never contemplated that persons engaged in business as partners may incorporate, with intent to obtain the advantages and immunities of a corporate form, and then, Proteuslike become at will a copartnership or a corporation, as the exigencies or purposes of their joint enterprise may from time to time require. The policy of the law is to the contrary. * * * They cannot be partners inter sese and a corporation as to the rest of the world. * * * Upon grounds of public policy, the doctrine contended for cannot be tolerated as it renders nugatory * * * the authority of the Legislature * * * in respect to the creation, supervision, and winding up of corporations.’

We approve of this doctrine. It is in line with the decision rendered in Beyer v. Woolpert, 99 Minn. 475, 109 N. W. 1116, where this court held that the grant of the franchise to be a corporation is an exercise of the sovereign power of the state, that it creates a contract between the state and the corporation and its members, and that the franchise cannot be surrendered and its obligations repudiated without the consent of the state. Of course, a copartnership may be formed to acquire and hold stock in a corporation. Such was not the purpose of the parties to this contract. They were individual stockholders in the corporations; they did not take the stock as copartners. To the world they appeared to be engaged in conducting five separate business enterprises, as the managing officers of as many corporations. They have had a falling out over the election of officers, and plaintiff, who was ousted from office, proposes to show that, by virtue of a private understanding with defendant, each corporation was really a disguised copartnership. The case is unique. None like it has been called to our attention. The learned trial court remarked that the mere statement of the proposition upon which plaintiff must rely in order to recover ought to be sufficient to show that the contract is contrary to public policy.

[2] Plaintiff asserts that, if the contract was contrary to public policy, defendant is in no position to question its validity because he recognized and acted on it for more than 20 years. A contract, void because contrary to public policy, cannot be thus validated. Neither party is estopped from questioning it because the other has parted with property or rendered services in reliance upon it. Colby v. Title Ins. Etc., Co., 160 Cal. 632, 117 Pac. 913,35 L. R. A. (N. S.) 813, Ann. Cas. 1913A, 515;Brown v. First Nat. Bank of Columbus, 137 Ind. 665,37 N. E. 158,24 L. R. A. 206;Bay v. Davidson, 133 Iowa, 688, 111 N. W. 25,9 L. R. A. (N. S.) 1014, 119 Am. St. Rep. 650;Tate v. Commercial Bldg. Assoc., 97 Va. 74, 33...