Bassett v. Fairchild , 132 Cal. 637 ( 1901 )

The plaintiffs bring this action as stockholders in the Bitumen Consolidated Mining Company, a corporation, one of the defendants, to recover from the other defendants, for the benefit of the said corporation, certain moneys alleged to have been illegally misapplied and withdrawn by them from the corporate funds of said corporation while acting as its directors. Judgment was rendered against the defendants, and they have appealed.

The defendant corporation was organized under the laws of this state, in 1891, with a board of six directors, and a capital stock of three hundred thousand dollars, divided into three thousand shares. The defendants Fairchild, Walrath, and Perine were directors of the corporation from its organization until the time of the commencement of this action (July 21, 1893). The defendant Miles was elected a director November 1, 1892, and thereafter acted as such director. The other two directors were the plaintiffs Bassett and Swift. The bylaws of the corporation were adopted at the time of its organization in 1891, and provide as follows: —

"The officers shall be a president, vice-president, secretary, and treasurer, which officers shall be elected by and hold office during the pleasure of the board of directors. The vice-president shall be the manager of the corporation. The compensation and tenure of office of all officers of the corporation (other than directors) shall be fixed and determined by the board of directors."

"The board of directors shall, at their first regular meeting, elect one of their number to act as president; and if at any time the president shall be unable to act, the vice-president shall take his place and perform his duties; and if the vice-president, from any cause, shall be unable to act, they shall appoint some other member of the board to do so, in whom shall be vested for the time being all the duties and functions of his office."

"The vice-president, in addition to the duties imposed upon him in article 7 (that is, when acting in place of the president), shall be the manager of the corporation, and shall perform such duties as may be prescribed from time to time by the board of directors."

At the organization of the corporation, Walrath was elected president, Fairchild vice-president and manager, and Perine treasurer of the corporation, and they continued to hold those offices until the commencement of the action.

The court rendered its judgment against the appellants, upon its finding as facts in the case, that they had mismanaged and illegally applied the funds of the corporation in the following particulars: In paying to the defendant Fairchild the sum of $6,475 for services rendered by him as manager of the corporation prior to November 9, 1892; in paying $1,888.05 for the expenses of certain litigation for the benefit of the defendants Fairchild and Walrath, and in which the said corporation had no interest; in paying $332.25 for the entertainment of certain San Francisco supervisors at a clambake in San Luis Obispo County.

The court finds that during all the time covered by these transactions the corporation was under the control and management of the four defendant directors, and that the aforesaid payments were made under their direction, and that the plaintiffs Bassett and Swift protested and objected to the said payments, and at no time ratified or sanctioned the same The payment of these sums of money out of the corporate funds, under the direction of the defendants, is not controverted, but they contend that they had authority to make them.

The facts connected with the payment of the money to Fairchild are as follows: As before stated, Fairchild was elected vice-president at the organization of the corporation, and by virtue thereof acted as its manager, under the provisions of the aforesaid by-law, and rendered various services to the corporation. It was provided in the by-laws that the funds of the corporation should be deposited in bank, and should be paid out only by the check or order of the president, countersigned by the secretary. October 11, 1892, Walrath, with the consent of the defendant Perine, withdrew from the funds of the corporation, $3,600, in disregard of this provision of the by-law, and without having the check therefor countersigned by the secretary, and paid the same to Fairchild for services rendered by him as vice-president and manager. November 9, 1892, the defendants Walrath, Fairchild, Perine, and Miles held a meeting of the directors, — the other directors, Bassett and Swift, plaintiffs herein, not being present, — and caused the following resolution to be entered upon their records: —

"Whereas, J.A. Fairchild has been in the employ of the Bitumen Consolidated Mining Company since its organization, as its managing agent and manager; and

"Whereas, He has been paid by authority of the president thirty-six hundred dollars on account of the services rendered for the company;

"Therefore, be it resolved. That the acts of said president in advancing and paying the said J.A. Fairchild said sum of thirty-six hundred dollars on account of his services be and the same is hereby approved, ratified, and confirmed."

At the same meeting they also caused the following resolution to be spread upon their minutes: —

"Whereas, J.A. Fairchild was, on September 1, 1891, duly elected by this board of directors vice-president and general manager of this company, and has continued to act as such general manager, and no salary for the services have been fixed;

"Now, be it resolved, That the salary of J.A. Fairchild as general manager of this company be and the same is hereby fixed at the monthly salary of two hundred dollars per month from November 1, 1891, to April 1, 1892, and that thereafter, to wit, from the first day of April, 1892, he shall receive as general manager of this company a salary of seven hundred and fifty dollars per month, and remain the same until changed by the board of directors."

These resolutions were adopted by the votes of Walrath, Perine, and Miles. Fairchild, although present, did not vote upon the adoption of either of them. Under this resolution there was paid to Fairchild, as and for his salary for services rendered prior to November 9th, the sum of $2,875, aside from the sum of $3,600 which had already been paid to him by Walrath. At a general meeting of the stockholders, held January 9, 1893, at which there were present the holders of 2,510 shares of stock, a resolution was adopted, "that all the acts of the board of directors of this company for the past year be approved and ratified." 1,510 votes were cast in favor of the resolution, and 1,000 votes against it. The plaintiff Swift voted 1,000 shares against its adoption; and of those voting in its favor, the defendant Fairchild represented 500 shares, Perine represented 485 shares, Walrath 500 shares, and Miles 10 shares.

1. That the action of Walrath in withdrawing three thousand six hundred dollars and paying it to Fairchild without any authority from the board of directors, and in disregard of the by-laws of the corporation, was a violation of his duty as director, as was also the act of Perine in consenting thereto, and of Fairchild in receiving the money, is not open to question, and has not been contended for by the appellants. No validity was imparted to this act by the resolution adopted at the meeting of November 9th. At that meeting there were present only four directors, and Fairchild was one of this number. Although he abstained from voting, there was not a competent majority of the board at that meeting to bind the corporation. The resolution then adopted, ratifying the act of Walrath in making the payment, was not, therefore, valid as a corporate act, and the resolution purporting to fix the salary of Fairchild was equally invalid for the purpose of creating any obligation against the corporation. Curtin v. Salmon River Hydraulic etc. Co., 130 Cal. 345.⁵) Neither is the position of the defendants fortified, nor did they receive any immunity from their acts, by reason of the vote of the stockholders in January, 1893, purporting to ratify the acts of the directors during the previous year. The resolution of November 9th, as we have seen, did not constitute an act of the "board" of directors, and, consequently, could not be affected by this resolution of the stockholders. Moreover, it was not in the power of a majority of the stockholders to vote to themselves or to one of their number the funds of the corporation, against the protest and objection of the minority. A majority of the body of stockholders has no power to vote away the funds of the corporation for an illegal purpose, or to make a gift of its funds, against the will of the minority. If the claim of Fairchild for his services was not a legal charge against the corporation, a majority of the stockholders could not authorize its payment, and their ratification of an unauthorized payment by the directors would add no strength to the act of the directors in making such payment. The stockholders had no authority to determine what should have been the salary of the manager. Both by the statute (Civ. Code, sec. 305), and by the by-law above quoted, this authority was conferred upon the board of directors, and could not be exercised by the stockholders. (See Gashwiler v.Willis, 33 Cal. 11.⁶)

2. It is contended, however, by the appellants that the services rendered by Fairchild constituted a valid claim against the corporation, which could have been enforced by him, and that they were therefore justified in paying this claim. This proposition is rested upon their contention that his services as manager were of great value to the corporation, and were of an extraordinary character, and not within the scope of his duties as a director or officer.

The by-laws herein provide that the compensation of all of the officers of the corporation shall be fixed and determined by the board of directors, and the court finds that the board of directors did not, prior to November 9, 1892, adopt any resolution fixing or determining the compensation for any services that might be rendered by Fairchild, and that there was no contract or agreement betwen them at any time, prior to November 9th, with reference to his salary, or to the compensation to be paid for his services, and "that he acted as such manager and vice-president without any contract respecting such salary."

The rule is well settled, that, in the absence of any provision, agreement, or resolution on the part of the corporation fixing a salary or compensation for its directors, who are also officers, they are not entitled to any compensation for services rendered by them as such officers or directors.(Smith v. Putnam, 61 N.H. 632; Sawyer v. Pawners' Bank, 6 Allen, 207; Maux Ferry Gravel Co. v. Banegan, 40 Ind. 361; Ellis v.Ward, 137 Ill. 509; Kilpatrick v. Penrose Ferry Bridge Co., 49 Pa. St. 118;⁷ Kelsey v. Sargent, 40 Hun. 150; MetropolitanElevated Ry. Co. v. Kneeland, 120 N.Y. 134;⁸ Pew v. First Nat.Bank, 130 Mass. 391; Pierce on Railroads, 31; Wickersham v.Crittenden, 93 Cal. 17.)

In McCarthy v. Mount Tecarte L. W. Co., 111 Cal. 337, this court said: "As the respondent was a stockholder and director of the corporation, he was not entitled to compensation for services rendered by him for it, no matter under what claim or officialposition, unless there was some kind of a contract for suchcompensation." The interest of the directors in the subject-matter of the trust, and the advantages to be derived from their individual supervision of a corporation, is deemed to be a sufficient consideration for assuming the position, and authorizes the presumption that they undertook to perform its duties without the acceptance of compensation. Such presumption can be overcome only by an agreement or resolution on the part of the corporation to the contrary before the services are rendered. This is but the application of the general rule as to the compensation of trustees. A trustee cannot, by his own act, while executing the duties of his trust, or by the performance of the duties assumed by him therefor, create an obligation against his beneficiary. By accepting the trust he assumes to act for the benefit of his beneficiary, and to perform gratuitously all the services necessary therefor. If the particular duties of his office are not defined, whatever services he may voluntarily render will be presumed to have been within his contemplation when he entered upon the trust, and he has no right of recovery for any services required of him in the exercise of the trust which may be referable thereto, and for which no compensation has been fixed. This rule has been applied where one of a board of directors was appointed treasurer, and performed the duties of that office (Holder v. Lafayette etc. R.R. Co., 71 Ill. 106⁹); where the president of a bank was appointed superintendent of the repairs of the bank building (Pew v. First Nat. Bank, 130 Mass. 391); where the vice-president of a corporation was also appointed its general superintendent (Besch v. Western Carriage M. Co., 36 Mo. App. 333); where the president of a corporation was appointed its manager (Rose v. Eclipse Carbonating Co., 60 Mo. App. 28).

In the cases cited in the opinion of Mr. Justice McFarland, where the right to compensation for services was upheld, this right was based upon the ground that the services were outside of the functions of a director, and had been rendered either in some ministerial or executive capacity, — such as secretary or treasurer of the corporation, or as superintendent or manager of its works, — to which he had been appointed by the other members of the board, or had been rendered under a similar appointment or authority in matters entirely distinct from the management of the corporate affairs, as in the case of an attorney at law or agent, whose functions were such as could be delegated by the board of directors to a person not a member of the corporation. In the Fitzgerald case the court bases its ruling upon the fact that "the character of all the services rendered by him placed them outside of official duties proper." A portion of the claim for these services, as stated by the court, was for the expense and trouble in procuring money for the company while acting as its treasurer. In its instructions to the jury, the circuit court had said that "if Fitzgerald acted as superintendent, treasurer, or general manager of said company, and transacted the usual business that devolves upon such officer, etc.," he would be entitled to recover. In commenting upon this instruction, the supreme court concedes that the reference therein to the "treasurer" was erroneous, but that the error was unimportant, saying, in its opinion, immediately following that portion which is quoted by Mr. Justice McFarland: "The reference to the treasurer as made in one clause of the charge, even though inaccurate, was not of sufficient moment to require a reversal of the judgment." In none of these cases does it appear that the services for which the director was held entitled to compensation were rendered by him by virtue of his office, or that they were rendered in exercise of the official duties which he had assumed by virtue of his position as director.

In the present case, Fairchild did not hold the position of manager by reason of any special appointment to that office by the board of directors. He was manager only by virtue of his position as vice-president, and whatever service he performed as manager was by virtue of this position. The by-laws declare: "The vice-president shall be the manager of the corporation, and shall perform such duties as may be prescribed from time to time by the board of directors." His election as vice-president made him ispo facto manager, and his acceptance of the office carried with it an obligation on his part to perform all the duties required of the manager. It does not appear that any duties were imposed upon him or prescribed for him by the board of directors, after he was elected a director, other than those which existed by virtue of the by-laws, and the court finds that all of the services rendered by him prior to November 9, 1892, "were rendered within the functions of vice-president and manager of said corporation and director thereof." These findings of fact are fully sustained by the evidence, and upon these facts the court has no alternative than to hold that he was not entitled to any compensation or salary for any of the services rendered by him as vice-president or as manager during this period, and that the appellant should restore to the corporation the money that had been withdrawn for the payment of the services.

This liability does not depend upon any proof or finding of negligence or fraud on the part of the defendants, or upon the extent or value of Fairchild's services. The defendants may have acted in the utmost good faith in making the payment, and the corporation may have derived great benefit from his services, but, as the law forbids him from receiving any compensation therefor, they were not authorized to make the payment, and the legal obligation exists upon them to restore the money so withdrawn.

The rule invoked by the appellants, that the law implies an agreement for compensation when one receives valuable services from another, has no application in the case of services rendered to a corporation by one of its officers or directors. The mere fact that a director has rendered valuable services to the corporation does not create an implied promise on the part of the corporation to pay him therefor. The presumption, in such case, that the services were rendered gratuitously can be overcome only by showing an agreement for such compensation before the services were rendered, or that the services were distinct from those which pertain to the office; and the burden of making this showing is upon the claimant. The absence of an agreement that he should not be compensated therefor is not enough. It must be affirmatively shown that an agreement for compensation was made before the services were rendered.

The finding of the court, that "no contract" respecting his salary was made before the 9th of November, includes an implied as well as an express contract, and its findings that the services rendered were within his functions as vice-president and manager, preclude any implied promise to pay therefor. There could be no implied assumpsit for services which the law presumes he had agreed to render gratuitously. There were no duties imposed upon him after he was elected director of the corporation, other than existed by virtue of the by-laws. Whatever services he rendered to the corporation were performed at his own suggestion, and without any direction from the board of directors, and it must be held that they were performed gratuitously, and without any expectation of compensation.

The judgment and order should be affirmed.

Temple, J., and Beatty, C.J., concurred in the dissenting opinion.

Rehearing denied.

⁵ 80 Am. St. Rep. 132.

⁶ 91 Am. Dec. 607.

⁷ 88 Am. Dec. 497.

⁸ 17 Am. St. Rep. 619.

⁹ 22 Am. Rep. 89.