Uccello v. Gold'n Foods

• Citation: 325 Mass. 319,90 N.E.2d 530,16 A.L.R.2d 459
• Parties: , 16 A.L.R.2d 459 UCCELLO v. GOLD'N FOODS, Inc. et al.
• Decision Date: 08 February 1950
• Court: United States State Supreme Judicial Court of Massachusetts

Page 530

90 N.E.2d 530

325 Mass. 319, 16 A.L.R.2d 459

UCCELLO v. GOLD'N FOODS, Inc. et al.

Supreme Judicial Court of Massachusetts, Suffolk.

Feb. 8, 1950.

J. G. Kelly, Boston (S. A. Valenti, Boston, with him), for plaintiff.

J. F. Groden, Boston (C. C. Worth, Boston, with him), for defendants.

Before QUA, C. J., and RONAN, WILKINS, SPALDING and COUNIHAN, JJ.

WILKINS, Justice.

This minority stockholder's bill against a Massachusetts business corporation and three officers and directors seeks damages for mismanagement and restoration of sums paid as salaries to the individual defendants. From a decree dismissing the bill the plaintiff appealed. The judge made a report of the material facts found by him, which, although voluntary, was apparently intended to include all facts necessary for the determination of the issues. Later on motion of the plaintiff and still later with the consent of the parties he respectively made two reports of additional material facts. We treat the three reports as having the same effect as a report under the statute. G.L.(Ter.Ed.) c. 214, § 23, as appearing in St.1947, c. 365, § 2. Goldston v. Randolph, 293 Mass. 253, 255, 199 N.E. 896, 103 A.L.R. 1117. The evidence is not reported.

The corporate defendant was organized in 1942, and during the period now material engaged in the manufacture of dressings for salads and for other foodstuffs. It sold mostly through brokers. Owing to the poor quality of ingredients obtainable it manufactured an inferior product which sold during wartime but not for long thereafter, and as a result it received numerous complaints and returns of merchandise. By July, 1947, the company's market was gone, and it ceased manufacturing. The defendant Soucy was treasurer and a director from February 13, 1943, and president from August 17, 1944, to October 17, 1944, and from January 15, 1946. He was the dominant figure in the company and acted as a sort of general manager. He assumed the responsibility of deciding all major problems, lending large sums of money to the company and indorsing its notes at banks. 'All its troubles and headaches were his.' The defendant Brady became a director and a vice-president on October 17, 1944. He assisted in making contacts for sales, in finding and arranging for a new and suitable plant, in procuring equipment and machinery, in advising in setting up the plant with respect to productive efficiency, in obtaining materials for production, which were scarce and hard to obtain, and in many other ways. The defendant Grasso was elected vice-president on April 19, 1943, and director on August 17, 1944. From 1943 he served as superintendent of the company's plant, and was responsible for and in charge of all plant operations.

The plaintiff, a ventilating, plumbing, and heating contractor, was never an officer or director. As a contractor, he did some work at the company's plant in 1943, and he became a stockholder on May 31, 1944. He was employed on a salary in the spring of 1946 to set up machinery and equipment in the company's new plant and to make ready for operations. Thereafter he was employed as maintenance man.

1. On the issue of mismanagement the burden of proof is on the plaintiff to show want of good faith or failure to exercise reasonable intelligence. The officers of a business corporation, as distinguished from a banking corporation, are not responsible for mere errors of judgment or want of prudence short of 'clear and gross negligence.' Spiegel v. Beacon Participations, Inc., 297 Mass. 398, 410-412, 8 N.E.2d 895, 904; Murphy v. Hanlon, 322 Mass. 683, 686, 79 N.E.2d 292.

The judge's findings do not assist the plaintiff in sustaining the burden of proof in either respect. The statement, 'I do not find that in any of their dealings with the money or affairs of the company * * * any one of the defendants was prompted by a dishonest purpose or with a consciousness of wrongdoing,' is tantamount to an express finding of failure to show want of good faith. The statement, 'I do not find that their conduct was wanton or reckless or clearly and grossly negligent,' is attacked as inconsistent with certain findings, which follow. 'In the fall of 1946, it was becoming increasingly apparent that the company was facing serious trouble. The immediate postwar years had been very difficult; commodities had been rationed, machinery was on priority and both were very scarce; oils, sugar, and starch could scarcely be obtained, and the company was obliged to choose between shutting down or using every possible means to get materials and equipment, and to use substitutes of a lower grade and quality as ingredients. * * * Because of inferior or inadequate ingredients used in the preparation and manufacture of its product it fermented and spoiled especially if it was not consumed soon after it was made; and would be more apt to spoil if subjected to unusual heat. Notwithstanding that it was an inferior product, it was usable and not harmful if used within a month or so after it was made and perhaps for a longer period if kept at favorable climatic temperatures. * * * The defendants knew while they were producing French dressings and salad dressings that they were doing it under unsatisfactory conditions and that the ingredients used were of inferior quality. They knew that some of it was spoiling, and that it would spoil unless used very soon after it was produced; and should have known that it probably would not stand the harmful effect of freight delays to distant destinations and continuous heat.' We do not agree that these findings required a conclusion that the individual defendants' conduct amounted to 'clear and gross negligence,' or that it was a violation of the requisite standard of duty that they did not resolve the question, whether to continue to try to do the best possible under war conditions or to shut down, in favor of shutting down. There were other findings, too, which militate against the plaintiff's contention. It was found that the company's sales aggregated about $1,750,000; that about one fifth of the goods sold spoiled or was claimed to have spoiled; that the company took back goods or allowed credit to a total of only about $75,000; and that in doing so the individual defendants acted reasonably and did what they considered for the best interests of the company.

2. The judge found that 'the monies received by Soucy and Brady were not predicated upon fair and reasonable value of the services rendered, but upon the theory of income on their investment and the then ability of the company to pay a return on their investment.' The company never declared a dividend, and no sums were voted to the individual defendants by way of salary. The judge stated, 'Although I find that some of the things done by Soucy and Brady were of value to the corporation, I do not find that they were performed under such circumstances that an obligation on the part of the corporation to pay is shown to be implied.' Soucy and Brady expected in some way to be compensated, but never consciously distinguished or considered whether what they were doing was being done in their capacity as stockholders or officers, or in some other relationship.

Prior to May 31, 1944, Soucy and one Ulin each owned one half the capital stock. On that date the old stock was retired, and five hundred shares of class 'A' common at $1 par value with the only voting power were given to Soucy and to Ulin for the old stock. There were then authorized five hundred shares of class 'B' common at $1 par value and five hundred shares of six per cent cumulative preferred at $100 par value, and there were then issued for cash the following amounts of class 'B' common and of preferred: to Soucy one hundred seventy shares of each; to Ulin seventy-six shares of each; to the plaintiff twenty-five shares of each; to Grasso ten shares of each; and to one Selling, a food broker, ten shares of each. On August 16, 1944, Soucy purchased all of Ulin's stock for $12,440, and thus became the owner of all the voting stock. Soucy then interested Brady in the company. Soucy told Brady that if Brady purchased from Soucy seventy-six shares of preferred stock and two hundred sixty-four shares of the two classes of common stock, and if Brady purchased twenty-one shares of preferred stock from the company, he would then own one third of the company and would have the option to buy in the same ratio if additional treasury stock should be sold. Soucy also told Brady that Soucy was drawing no salary; that when Soucy should take a salary, Brady would be paid a salary equal to one third of Soucy's salary; and that at the next meeting Brady would be elected a director and vice-president. On October 1, 1944, Brady bought the stock from Soucy for $12,500, but not the additional shares from the company. On October 17, 1944, at a stockholders' meeting, a letter from Soucy confirming the agreement with Brady's written acceptance was entered in the minutes, and Brady was elected as agreed. This was the last discussion about salaries or compensation to Soucy or Brady until a meeting in January, 1947, when it was agreed to suspend the payment of salaries to all stockholders except Grasso, as will later appear. During the period of their agreement, Soucy and Brady received money from the company at the same ratio. In all Soucy received $26,250 as follows: $4,400 in 1943, $5,250 in 1944, $6,600 in 1945, and $10,000 in 1946. In all Brady received $6,097.50 as follows: $507.50 in 1944, $2,260 in 1945, and $3,330 in 1946. The payments to Soucy up to May 31, 1944, were made with the knowledge and acquiescence of all the stockholders.

On March 20, 1946, all outstanding stock was retired, and the company was authorized to issue ten thousand voting shares without par value. Five shares were exchanged for each share of preferred stock and one share for each share of 'A' or 'B' common stock. On October 31,...