Benson v. Borden

Mitchell, J., delivered the opinion of the Court.' The appeal in this case is from a-decree of the Circuit Court for Allegany county, passed on October 4th, 1937, in the matter of the receivership of the Big Savage Fire Brick Company. The decree rejected certain claims filed in said cause by the appellant and allowed certain claims of the receiver as against the appellant. It further allowed other claims filed in the cause by the appellant, and decreed that the latter allowances be set off against indebtedness found to be due by the appellant to the receiver; and, finally, decreed that the difference between the conflicting claims, as allowed, be held as a personal obligation of the appellant to the receiver.- The Big Savage Fire Brick Company, -hereinafter designated as Company, was incorporated in 1902 for the "purpose, as its corporate - name implies, of engaging in the manufacture of bricks and burnt clay products; its plant and principle office being located in Allegany County. At the time of the -incorporation, Davisson Armstrong was elected president and continued as such ²⁰⁵ until a short period before his death, which occurred on June 1st, 1935.

The record reveals that Mr. Armstrong was at that time an active business man, and that he was connected with the Borden Mining Company and the Citizens’ National Bank of Frostburg, in addition to his position as president of the Brick Company. He was eighty-six years of age at the time of his death, and, according to the testimony of his physician, he suffered from arteriosclerosis and advanced senility as far back as 1932, and his condition became serious upon the closing of the bank in 1933. At the time the Company was organized, John N. Benson, the father of the appellant, was elected vice-president and general manager of the Company, and held that position until his death, which occurred in 1919. The first official connection the appellant, Davisson A. Benson, Sr., had with the Company was that of secretary, and, upon the death of his father, he was elected vice-president and treasurer, in which position he also performed the duties of general manager.

It does not appear from the record what compensation the appellant originally received as vicer-president and treasurer, but it does appear by resolution of the board of directors, passed on January 31st, 1934, that the salary of such officer was fixed at $5,000 per annum, accounting from January 1st, 1924; and there is no evidence in the record that that resolution was ever formally rescinded by the directors. It is conceded that the appellant received the full payment of his salary, on the above basis, until January 1st, 1928, and that after that date he drew, or was paid, irregular sums, as follows: 1928, $3,200; 1929, $1,800; 1930, $3,200; 1931, $1,800; 1932, $3,200; 1933, $1,800; 1934, $3,200; 1935, $1,800. His official position with the Company terminated on January 31st, 1936, and he received no salary payment for the latter month. The Company met with reasonable success and paid dividends on its stock until 1927; after that year, however, it began to lose money and rapidly became involved. ²⁰⁶ In January, 1936, the appellant and his son, D. A. Benson, Jr., were ousted as directors of the Company, and this action was followed by the appointment of Frederick Y. Borden, the appellee, as receiver for the Company, by the Circuit Court for Allegany County, which assumed jurisdiction in the premises on January 31st, 19,36.

In response to a general notice of the receiver to the creditors of the Company to file their respective claims in the above proceedings, the appellant filed claims as follows: Open account for unpaid salary..................... $20,416.66 Open account for bills paid on behalf of the Company, by the appellant.................. 117.62 Principal note indebtedness due appellant ................................................................................... 10,000.00 Interest on above notes to July 1,1936...... 692.27 Royalty on coal furnished the Company by the appellant, accounting from January i, 1928, to January 31, 1936... 19,327.35 Total................................................................................ $50,553.90 In addition to the above, the appellant, on his own behalf and on behalf of F. A. Buchholz, a former director of the Company, filed a promissory note held by them jointly, as follows: Principal of note.............................................................. $5,000.00 Interest to July 1,1936............................................... 259.02 Total................................................................................... $5,259.02 It may be here noted that, at the hearing in the lower court, it was shown by the records of the Company that additional sums collected by the appellant as payments to him on account of coal royalties alleged to be due him were not credited on the coal account as filed, whereupon the appellant corrected the claim by allowing said credits in the aggregate sum of $3,445.26. To summarize, therefore, the total indebtedness, as ²⁰⁷ corrected, claimed by the appellant against the receiver, is as follows: (a) Open account for unpaid salary......... $20,416.66 (b) Open account for bills paid.................... 117.62 (c) Adjusted coal royalty account............ 15,882.09 (d) Company notes held individually, plus interest thereon................................. 10,692.27 (e) One-half of Company’s note, held jointly, plus interest thereon............ 2,629.51 Total................................................................................ $49,738.15 Exceptions to the allowance of claims (a) and (c) were filed by the receiver as follows: (a) Because the appellant at the time he ceased to draw the full salary of $5,000 per annum, as originally authorized by resolution of the board of directors in 1924, was in sole control of the operation and management of the Company, due to the illness of its president; that the salary was not paid in full because it was not earned and could not therefore be collected; that no claim for balance due on salary was ever set up on the books of the Company, which were kept under the direction of the appellant, until they were audited in 1935, shortly before the receivership; that meanwhile, acting as president of the Company, the appellant caused financial statements to be annually presented to its stockholders, which did not reflect the liability indicated, and that, as acting president and general manager, he furnished creditors with financial statements relating to its affairs, which did not include such liability. For these reasons, it is alleged that the actions of the appellant show that there was an implied reduction in his salary, which was acquiesced in and ratified by the directors and stockholders and himself; it being further alleged that the transaction between the appellant and the Company, for which he was acting in this regard, constituted an abandonment or waiver of the salary balances, and that, having waived and abandoned such claims, he cannot now assert the same against the Company. ²⁰⁸ (c) Because a part or all of the equipment used in the coal mine of the appellant was purchased and paid for by the Company; that in any event its books showed that an electric hoist used in the coal mine was purchased and paid for with its funds; that the foreman of the coal mine was the same person in charge of the Company’s clay mine, his entire salary being paid by the Company; that all electric power used in the mine was paid for by the Company; that equipment and materials used in the operations of the coal mine were repaired and replaced at the Company’s expense. That its books showed that the appellant received monthly payments for coal until 1928, since which time no further regular payments were made, and that the costs of all mining operations, including workmen’s compensation insurance, were paid directly by the Company and carried on its books as current liability; that, during the period since 1928, no account payable was set up on the books representing royalty or profits due the appellant, although the said books during the entire period were kept under the exclusive direction and control of the appellant.

It is further alleged in this connection that the annual reports submitted under the direction of the appellant showed no such liability, and that during the year 1935, while acting as president, the appellant prepared and furnished to certain creditors, namely, Borden Mining Company, lessor of the coal mine, and Thomas B. Finan, receiver of the Citizens’ National Bank of Frostburg, financial statements which failed to show any liability to the appellant for the coal royalties now claimed; and, further, that the minutes of the directors fail to show that any royalty contract was entered into between the appellant and the Company, or approved and ratified by the directors. As to the loan, and advance payment on open account indebtedness, claimed under designations (b), (d), and (e), objection was made to the payment because of a counterclaim or set-off, alleged to be due by the appellant to the receiver, for wages paid servants employed ²⁰⁹ in the home of the appellant by the Company from the year 1922 to 1935, amounting approximately to the sum of $9,297.50; it being set forth, in the receiver’s objections and exceptions, that no authorization for such payments, in the nature of additional compensation to the appellant, was ever granted by the Company’s directors. It was further claimed by the receiver that the Brick Company sustained other losses through the organization of an independent corporation by the appellant, the same being known as “Standard Arch Company”; that the expenses incident to its operations were paid from funds belonging solely to the Brick Company, at the instance of the appellant, and that these losses were properly chargeable as a set-off against any sum found to be due the appellant. The answer of the appellant to the exceptions of the receiver, in substance, sets forth: (a) A general denial that the appellant acted as president of the Company or was in sole control of its operations from 1928 to 1935; and the assertion that Mr. Armstrong actively performed the duties of president and director and was fully cognizant of all of its affairs until the date of his death.

(b) Denial of any agreement to a reduction in salary, alleging that, during the period covered by the claim and down to the date of the receivership, the directors of the Company had knowledge that the full salary was not being paid; that they agreed, from time to time, that it be paid, and that the appellant at no time waived or abandoned the same. (c) Assertion that during all the period covered by the coal claim, the directors of the Brick Company had knowledge that the coal was being used from the mine under an agreement that the Company would pay for the same at some later date; that the reason payment was not demanded was because of the financial condition of the Company, and that at no time did he waive payment. Further answering, the appellant denied that the equipment used in the coal mine was paid for by ²¹⁰ the Brick Company. He admitted that the electric hoist did belong to the latter company and was in the coal mine, but denied that it was ever used in the mining operations.

(d) It was admitted in the answer that the annual reports and statements submitted by the appellant to directors and stockholders did not show the salary and coal claims, but alleged that those connected with the company were informed of these claims, and advised that the reason they were not being paid was because of the financial status of the organization, and that the directors acquiesced in such action. (e) The appellant denied the right of the receiver to a set-off by reason of the payments by the Company of wages of servants employed in the home of the appellant, and submitted that such payments had been made over a period of thirty years with the acquiescence and approval of the stockholders and directors; that his predecessor had enjoyed the same concession, and that said servants also, from time to time, engaged in work for the 'Company. Under this state of the pleadings, testimony was taken in open court by the respective parties; the receiver adducing evidence tending to prove that the president, Mr. Armstrong, died at the age of eighty-six years, and was both mentally and physically incapacitated for business service several years before hi's death; that meanwhile the business of the Company was conducted as a one man corporation by the appellant, and that, the directors met at irregular intervals; that information as to the true status of the affairs of the Company was withheld from them; that the appellant had stated on two occasions that he was taking a cut in his salary, the occasions being when he notified other employees of the necessity for successive reductions in wages; that the books of the Company were kept under the appellant's direction by his niece; that no audit was made of them until as late as 1935, and only then because of pressure from creditors; that, during the course of his control ²¹¹ and management, the appellant made application for loans to the Company from a Federal Reserve Bank, and from the Reconstruction Finance Corporation, and, in statements furnished under oath by him for the purpose of obtaining said loans, did not set up any liability for the personal indebtedness he now claims against the Company. Nor did he claim the said indebtedness as an asset in his personal statements also furnished and sworn to in connection with said applications.

That the alleged claims were not shown in financial statements made by the appellant and filed under oath with federal income tax reports of the Company from 1928 to 1935; that similar omissions of the claims were made in statements furnished creditors of the Company as set forth in the objections; that the appellant used bricks from the Company’s plant of the approximate value of $585 for his personal purposes and did not pay for the same; and, generally, the receiver offered evidence in support of all allegations set forth in his objections. The appellant, testifying on his own behalf, explained that the reason 'the salary account was not kept current was because the earnings of the Company ceased to be such as to permit regular monthly payments, and, in defense of that claim, stated that 'the matter was brought to the attention of the president and the directors from time to time, and that it was always understood that he would be eventually paid. John R. Atkinson, a former director, testified that the appellant did bring the matter of his salary claim before the board of directors some time in 1934 and 1935. He also testified that at that time the board was aware of the salary claim and agreed that it be paid, but he did not know the amount then claimed.

On cross-examination he stated that he never noticed any charge for salary or coal on statements furnished the directors. He did not know of any agreement with the Company relating to coal profits, and, as far as he knew, there were never any minutes made as to the amounts claimed to be due by the Company to the appellant. He also testified that ²¹² for the past ten years the affairs of the Brick Company were almost entirely in the hands of the appellant. On the other hand, Lawrence D. Willison, another director up to 1934, testified that the appellant stated that the Company owed him money, 'but that he never knew that the appellant was being paid for coal from the mine; nor did he know that the Company carried on its payroll an employee who worked as a servant at the home of the appellant.

With reference to the coal account, the appellant testified that in 1921 he acquired individual control of a coal mine located in close proximity to the Brick Company’s plant through a lease from Mr. Armstrong, the president of the Brick Company, who at that time represented the Borden Mining Company, the lessor; that he equipped the mine and started its operations at hi's own expense, and later began to supply the Brick Company with coal used in its operations. That the coal was regularly paid, for at an agreed price .until January, 1928, and that the bookkeeper of the Brick Company also kept the books of the “D. A. Benson Coal Mine.” He further testified that in January, 1928, he ceased to operate the coal mine, and, under a verbal agreement or understanding with Mr. Armstrong, acting as president, it was operated by the Company; the appellant to be paid the sum of $2.20 per ton for all coal taken from the mine, less, however, the cost per ton for mining the same. The witness stated that at the time of the agreement with Mr. Armstrong the market price for the grade of coal found in his mine was $2.20 per ton, and that he had received no payments under the royalty agreement except some minor credits for current mine expenses. As has been noted, however, other substantial credits were shown by the receiver, and the account as originally filed accordingly amended.

The appellant admitted his participation in the preparation of financial statements relating to the affairs of the Company for submission to its stockholders, directors, and creditors, and to the Federal Reserve Bank of ²¹³ Richmond, Virginia, and the Federal Reconstruction Finance Corporation, for the purpose of securing loans from the latter two governmental agencies. He further admitted the preparation of income tax reports for both the Company and himself. Most of these papers were signed by him in his official capacity and sworn to by him, and in none of them do the salary and coal royalty items appear as liabilities of toe Company, or as accounts receivable in his own income tax returns. Furthermore, no minute appears on toe records of the meetings of the board of directors relating to these items.

In explanation of the item of servant’s wages, which was pleaded as an offset to his claims against the Company, the appellant testified that, when his father was vice-president and general manager of the Company, through Mr. Armstrong, toe president, or at least with his acquiescence, an old colored servant was employed at the expense of the Company; that later his father lived with toe appellant, and that the latter kept the servant on the payroll “as a sort of pension to run errands.” From time to time others were employed,'but at no time was there more than one such employee on the pay roll, and the custom was continued by the appellant until the receivership. This testimony was not denied. There is no minute showing authority for this transaction, but it prevailed from almost the beginning to the end of the Company’s activities, and the name of the respective employees regularly appeared on the pay roll as such. Miss Clark, the bookkeeper over a long period of years, testified that at least one of toe men so employed for a time worked for the Company in its clay mine; while on the other hand, Miss Wilson, the pay-roll keeper since 1925, testified that none of them, to her knowledge, worked in the Company’s plant.

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