DAVIS V. M1U{PEIS. C1TY BY. CO.
888
DAVIS
v.
MEMPHIS CITY
By. Co.
(Circuit Court, W. D. Tenne8see.
February 6, 18811.)
1.
CORPORATIONS-LIABILI'fY OF OFFICER OR DIRECTOR-FRAUDULENT SALARIES,
If an officer holding or controlling a majority of the stock should pack a di. rectory with his special friends, and they desert the interest of the company by granting an exccssive salary to him, their action is fraudulent, and he cannot recover the salary in a suit at law. Mere error of judgment, however, by the directory, acting honestly in fixing a larger sum than prudence would justify, does not constitute a valid defense.
2.
BAME SUBJECT-MALADMINISTRATION-COUNSEL FEES-DAMAGES-WRONGFUL EXPENDITURE OF CORPORATE FUNDS.
Where a corporation, in a suit by its president for his salary, pleaded, by way of set-off, the wrongful expenditure of its funds for counsel fees, held, that although it was his duty to consult the directory before incurring the expense, if he acted for the of the company in good faith, and did only what the directory might reasonably, and should properly, have done for the benefit of the company, he is not liable in damages by way of set-off, or otherwise. Nor is he liable, although the corporation had a regular attorney, for the employment of additional counsel in a suit against him and the other directors, personally, for maladministration, if the suit involved also the interest of the corporation, and the expenditure was reasonable and beneticial to the company, partiCUlarly where the directors knew of the employment, and made no objection. .
3. !::lAME SUBJECT-ADDITIONAL COUNSEL-PERSONAL BUIT-RATIFICATION BY DIRECTORY.
4. SA)IE SUBJECT-STOCKHOLDERS-FACTIONAL STRIFE-CHANGE 011' MANAGEMENT
Where a factional strife among the stockholders is ended by a compromise, and the majority changes, a court will not, on a suit by the president for his salary, undertake to review the merits of that litigation and apply it as a test to the conduct of the president whether his alliance of the company with the oue faction or the other was for its best interest or not. That matter is within the reasonable and honest discretion of the directory, and the courts will not supervise it by such a proceeding. Ii. SAME SUBJECT-SICKNESS OF OFFICER.
-SUPERVISION OF COURTS.
The fact that an officer is absent on account of sickness is not a defense against his claim for salary, if he procures the proper discharge of his duties by another officer authorized to act in his absence, and there be DO injury to the company by reason of the absence. ,
8.
NEW TRIAL-WEIGHT 011' EVIDENCE.
While a court will protect the parties against improper verdicts. It will not Impair the right of trial by jury under the disguise of determining whether the verdict is against the weight of the evidence.
Motion for New Trial. The suit was for $1,650, balance due Davis for his salary at the time he resigned from the company and turned the management over to the new parties who purchased his interest. The defense was that Davis had fraudulently procured the directors to fix his salary at an excessive sum, and that he had paid large sums of money, amounting to over $2,000, to Humes & Poston, as attorneys in the chancery case of Bills v. Davis, and the other directors, for a maladministration of the affairs of the company; the contention being that it was a suit aga.inst Davis, Barrett, and others, individually, in which the com-
pany had no interest. There were also other sums claimed as a setoff for fees paid these attorneys, of which the jury allowed, as set-off, a part paid in a litigation to defeat the forfeiture of the Citizens' Railroad Company, a rival corporation. 'rhe evidence was that Davis owned a very large majority of the stock, and all the other directors were small holders of stock purchased of him to qualify them as directors. He had been also president of a bank, during which time the vice-president of the railway company had received a salary, and there was also a purchasing agent, but, when the plaintiff retired from the bank, the salary of the railway presidency was increased, and the duties of purchasing agent added to the presidency; but the vice-president's salary was reduced, and by the changes there was a reduction of the aggregate salaries to a considerable amount, notwithstanding the large increase in that of the president. Proof was offered to show that, notwithstanding the reduction, the salary was excessive; that it was established to furnish Davis with an income; that he discharged the duties inefficiently and negligently, and managed the affairs of the company badly. He met this by proof offered to show to the contrary of all this. , The chancery suit of Bills was one by a stockholder, to hold the directors personally liable for maladministration, and resulted in a report of the master charging them each with a very large, personal liability. The chancellor rendered an opinion, also holding th'6m to a large liability, but no decree was entered, because Davis had bought out the plaintiff 'in that suit, and one of the directors, who had continued the litigation against the others on a cross-bill, being also charged by the chancellor with a large personal liability, compromised with Davis after the opinion was filed; and the matter was arranged by all the stockholders joining in the compromise. Subsequently, Davis sold out part of his interest, gave up the control, and ultimately left the company altogether. In the Bills suit the directory were en,joined from issuing $200,000 of the bonds of the company provided to pay its floating debt and to make improvements, and a receiver was demanded. The receiver was refused, and the injunction modified to allow the directory to issue one-half the bonds, the other being enjoined. There was no office of attorney, but the directors each year, by resolution, elected or employed a regular attorney for the company, and one was 80 employed at the time of the expenditures for additional counsel. The court, (HAMMOND, J.,) among other things, charged the jury as follows: "Undoubtedly the defendant company had a right to demand that the directors should fix the salary with sole reference to the illterest of the company, and without any reference to the selfish interests of the incumbent. His private interests were entitled to no consideration at his hands in acting in his capacity as a director, and to none at the hands of the other directors. His interest required, of course, that he should receive as much as the company would pay, and its interest demanded that the president should be paid
DAVIS.:1J. MEMPHIS CITY
ny.
CO.
885
as little as was consistent with the benefit of securing. the services. of a firstclass and efficient man. This the directors had a right to secure, and to pay for such services a fair and reasonable compensation. Nor can they be held· guilty of a fraud because of a mere error of judgment on their part. If, acting honestly and in good faith to secure what they believed to be the best inter· est of the company, they fixed the salary at too high a figure, as now appears from the probf,-if it does so appear to you,-it is none the less binding on the company. for that would be a mere error of judgment, and you should answer the first question put to you in the negative. But if you believe from the proof that the plaintiff, Davis, being the controlling stockholder, with abao· Jute power to elect the board by a vote of his stock, packed the directory with his especial friends, who were really and willing to do his bidding,,,and that he and they deserted the interest of the company, and, for his selfish benefit, fixed a salary that was beyond the sum it should have been, that action was fraudulent, and you should answer the first question submitted to you in the affirmative. "
On the set-off the court charged the jury that the president had the right to employ additional counsel to represent the company in any litigation in which it was interested, although it had regular at. torneys, provided the employment was an honest exercise of reasonjudgment, and not a mere pretext to give fees to his friends or to pay his own counsel out of the money of the company; the general principle being that, in all he or the directors do, the sole interest of the company should be the guide, and that they shall not use the funds of the company for their own benefit, even though they may own or control the great 1:9ajority of the stock. .The proof was that Davis was absent, sick, for about two months of the time sued for, but the vice·president agreed to and did act for him, and no injury to the company was shown. The conrt charged the jury on this point that, in the absence of any injury from the absence, it was, under the cir· cumstances, immaterial; that it would be a harsh rule to deprive an, officer of a corporation of salary during siclmess, if he guarded against inhuy by securing the services of the very officer elected to act in his. absence. returned a special The jury, under the instructions. of the verdict, on issues agreed upon by the counsel, as follows: (1) "Was the action of the of directors, "in fixing the salary of the plaintiff as president of the defendant corporation at $3,600 per annum, done fraudulently?" Answer of jury. No. ". ,(2) "Withoutreference to the contract, what were the services of the plaintiff worth to the defendant during the time here sued for?" Answel' of th/J jury. $1,650. . " (3) "Did the plaintiff perform the duties of president and purchasing agent of the defendant during the time for which he has here sued?" Answer oj thejury. Yes. (4) "How much of the defendant's money, if any. did the plaintiff cause to be paid to Humes & Poston, W. Y. C. Humes, and to W. Y. C. Humes & L. W. Humes for his own benefit, and here you will set out specifically each sum you may find to b,ave been so paid?" Answer of theju1'1J. Citizens' Railroad, $25(1; to Humes for Turner, $35; total, $285. (5) "Should either party be allowed interest upon such sum as may be due from one to the other?" Answer of the jury. No.
886
J'lI:DEBAL BEPOBTlI:B.
On this special verdict the judgment for the plaintiff would be $1,865, the issues all being found in his favor, except the set-off allowed by the jury to the extent of $285. George Gillham, (John D. Martin with him,) for plaintiff. Taylor &: Carroll, for defendant. HAMMOND, J. The only ground for a new trial, which is pressed with serious confidence by the counsel for the defendant, is the error assigned in charging the jury that the president of the company had authority to employ additional counsel in the litigation against the company, especially in the Bills case. It is frankly conceded, as it must be, that, as between the attorneys employed and the company, the president might bind the corporation to the employment without any contract under seal, or other formal action, by the directory. Bank of Columbia v. Patterson, 7 Cranch, 299; Osborn v. Bank, 9 Wheat. 738; Alexa.ndria Ganal Go. v. Swann, 5 How. 83, 89; Weeks, Attys. 833, § 190; Boone, ·Corp. § 144; Memphis v. Adams, 9 Heisk. 518. But it is insisted that, as between the president himself and the company, in a suit' for damages, or where his wrongful use of the money of the corporation is challenged,. as by this plea of set-off, the rule of decision is different, and that his action must be measured alone by his powers under the charter and by-laws. !tis argued that the charter and by-laws of the company provide a directory to manage its affairs, and an executive committee; that there were monthly meetings, and power in him, as president, to call s:pecial meetings when occasion required. Unquestionably, the plaintiff should have taken the course indicated by this argument, particularly under the circum· stances of that Bills case, and it is never safe for a president or other officer of a corporation to assume the responsibility that he did, except in an emergency-which did not exist in this case-that renders it unwise to delay action until the corporate management can be consulted and its judgment invoked. He makes himself liable for damages if he does so act without corporate authority. Stokes v. New Jersey Pottery Go. 46 N. J. Law; S. C. 24 Amer. Law Reg. 75. He is not, however, liable, unless his action results in injury to the company; and the courts do not proceed upon any theory of punishment for not consulting the corporate management. When the question arises, either in an action for damages or by plea of set-off, the law will not mulct the president in damages or withhold what he has justly earned, simply because he has not pursued the charter and by-laws. If he did only what the directory might and should properly do, and his action has resulted beneficially and not injuriously, why should he be liable for damages? At most, the damage could be only nominal to vindicate the law, and certainly he should not be made to pay where there was no injury to the company. Now, this is precisely the question the court submitted to the jury, and it approves their verdict. They were told distinctly that, if Davis Wfl,S using the money