Booth v. Robinson

Alvey, J., delivered the opinion of the Court. The bill in this case was filed on the 7th of August, 1875, by certain persons as shareholders of the stock of the Powhatan Steamboat Company, a corporation formed under the act of the Legislature of 1840, ch. 167, against the defendants, some of whom were directors in the company, for the purpose of obtaining redress for what is. alleged to have been their loss in the value of their shares of stock, by reason of certain wilful and'fraudulent mismanagement of the affairs of the corporation, to accomplish objects and purposes adverse to the interest of the-shareholders of the stock of the company. By the charter, the company was clothed with power to-provide itself with all necessary steamboats, and other-equipments, “to navigate the Chesapeake bay and its-tributary streams, for the conveyance of passengers, towing of ships, vessels, rafts or arks, and the transportation of merchandise or other articles.” The affairs of the company were required to he managed by a president and board of directors to consist of six persons, to be chosen from the stockholders, the president to be one of the six directors and a majority of the directors, at all meetings, to have power to act as if all were present. The power given by the charter to the board of directors, was very large, and comprehensive.

It authorized them not only to employ all necessary agents, to make contracts, to buy property both, ⁴²⁹ real and personal, for the purposes of the company, to build or purchase all such boats as they should deem necessary, etc., but the same, or any part thereof, to sell or ■otherwise dispose of, when, in their judgment, it should be to the interest of the company that it should be done. The directors, or the stockholders holding a majority of the stock, were authorized to call a general meeting ■of stockholders; “ and a majority of the stock represented at said meetings, shall have the power of closing and winding up the concerns of said company.” „ Before this company had been incorporated, the Baltimore Steam Packet Company had been incorporated by the Act of the Legislature of 1839, ch. 328; and the object of that company was to provide the necessary steamboats •and equipment, “to navigate the Chesapeake bay and its tributary streams, or to navigate the Atlantic coast, or ■any of the bays or rivers emptying into the Atlantic Ocean; and to connect thereto boats, vessels, stages, or other carriages, for the conveyance of passengers, towing ■of ships, vessels, rafts, or arks, and the transportation of merchandise or other articles.” The board of directors is required to consist of eight persons, to be chosen from the stockholders, and the president of the board to be one of the directors. The provisions of the charter, and the powers of the board of directors, are substantially, and •almost literally, the same as those contained in the ■charter of the Powhatan Steamboat Company. Both companies were organized and operated for several .years prio.r to the late civil war; but the war suspended the operations of both companies.

After the close of the war, the Steam Packet Company resumed operations, and the Powhatan Company reorganized, by the purchase of •several second-hand steamers for stock of the company, -at rates considerably in excess of the prices of the steamers to those disposing of them to thé company. The routes ■of the two companies were not at all in conflict the one ⁴³⁰ with the other. The route of the Steam Packet Company was between the City of Baltimore, Maryland, and the City of Norfolk, in the State of Virginia; and the main route or line of the Powhatan Company was from Baltimore to Richmond, hy way of the Chesapeake hay and James river; with a light draught boat plying on the Appomattox river, between Petersburg and City Point, on the James river, as a branch line. The Powhatan Company, after its reorganization, established a subsidiary route or line, from Baltimore to Richmond, by-way of the York river, connecting at West Point, on said river, with the Richmond and York River Railroad, running to and from the latter named city, and thus forming a through lin'e from Richmond to Baltimore.

These were the routes of the two steamboat companies, and there had been no serious conflict or competition between them prior to the fall of the year 1870 ; but there had been considerable competition between the Powhatan Company and the Richmond, Fredericksburg and Potomac Railroad Company, running from Richmond to Acquia creek, and from the latter point by steamers, hy way of the lower Potomac and the Chesapeake hay, to Baltimore City. The Powhatan Company had also encountered strong competition on its York river line, and was com-, pelled to buy off the steamers engaged in the opposition. In the latter part of November, in the year 1870, the Steam Packet Company became the purchasers of 1108 shares of the capital stock of the Powhatan Company, at $40 per share, the par value being $100 per share. This quantity of stock was about one-third of all then issued hy the company.

And, according to arrangement, this stock thus purchased was transferred to the names of Jno. M. Robinson and Samuel M. Shoemaker, two of the directors in the Steam Packet Company; and thereupon, two of the directors in the Powhatan Company, namely, Messrs. Lehr and O’Donnell, retired, and Robinson and ⁴³¹ Shoemaker were elected in their stead. Eohinson was also, at the time, and continued to he, stockholder and president of the Seaboard andEoanoke Eailroad Company, whose road runs from Norfolk, Va., to Weldon, in North Carolina, and of the Eichmond, Fredericksburg and Potomac Eailroad Company, and in the latter of which Shoemaker was also stockholder and director; and all of which companies are alleged to have been, more or less, competitors in trade with the Powhatan Company.

The bill charges, that Eohinson and Shoemaker, having obtained admission into the Powhatan Company, acted not for the promotion of the interest and welfare of the stockholders of that company, as they were in duty bound to do, but that they acted “on their own hehalf and for their own interest, as well as in behalf and for the interest of others owning and controlling together with themselves, a majority of the stock of said three confederating companies, unlawfully and covinously combined together, to cripple, embarrass, and destroy the said Powhatan Steamboat Company, so as to secure to the said Baltimore Steam Packet Company, and its said confederates, or such other companies as it might choose, a monopoly of the said routes of the said Powhatan Steamboat Company; ” and that it was with that view and purpose that they purchased on behalf of the Steam Packet Company the 1108 shares of stock, and procured themselves to be elected directors in the Powhatan Company; and from that time they continued their plans and contrivances for the ruin of the Powhatan Company, and finally brought it to total wreck, in the winter of 1875, by declaring it insolvent and thenceforth unable to proceed with its business. There are various acts and transactions charged as means resorted to to bring about the result. It is charged that through the contrivance of Eohinson and Shoemaker, the better to obtain complete control over the Powhatan Company, they being directors in both companies, the ⁴³² Steam Packet Company was induced to loan to the former company a large sum of money, ivithout corporate authority for so doing, and to take a hill of sale, absolute in form, of the Petersburg, one of the best steamers of the Powhatan Company, as security for such loan ; and which steamer was ultimately taken and appropriated by the Steam Packet Company. It is also alleged that they, with an intent to cripple the company, and to frustrate its prospects, refused to enter into an arrangement with parties owning and representing the Richmond and York River Railroad Company, in the spring of 1813, for the running a daily line of steamers, in connection with the railroad, between Baltimore and Richmond, by way of the York river, and that by reason of such refusal to make such connection, other steamers were placed upon the line, and strong competition brought about, resulting in ruinous loss of business and profit to the Powhatan Company.

It is further alleged, that by the wilful mismanagement of the property of the company, great wrong was done and loss sustained. As an instance of such mismanagement, the surrender of one wharf and the renting another at a larger rent, less available to the requirements ■of the company, at Richmond, is specified; also the refusal to repair the steamers of the company, and the allowing them to remain idle, while steamers of the Steam Packet Company were being chartered by the Powhatan Company for daily use; and finally the buying up a majority of all the stock of the Powhatan Company in order to get entire ■and complete control of the affairs of the company, for sinister and fraudulent purposes; are charged as so many ■distinct breaches of duty, all having for their object, and tending to the accomplishment ofj the complete ruin of the •company ; and that, by such means, the ruin of the company was in fact finally accomplished. The answers of the defendants, Moncure Robinson, John M. Robinson and Samuel M. Shoemaker, Thomas ⁴³³ Kelso, the Baltimore Steam Packet Company, and the Powhatan Company, strongly controvert many of the most material facts alleged in the hill, and utterly deny all charges of fraud, gross negligence, or intentional mismanagement of the affairs of the company by the board of directors, so far as the defendants were concerned; and aver and insist that the misfortunes, and disastrous termination of the operations of the company, were owing exclusively to the inherent weakness of the company itself; — its poor and insufficient equipment, and its want of sufficient capital to enable it to carry on its operations successfully. Jacob Brandt, a former director and president of the company, is also a defendant, and he filed a separate answer to the hill, in which he admits most of the material facts charged ; and he was afterwards examined as a witness for the plaintiffs.

There has been a very large mass of evidence produced, •documentary as well as oral testimony of witnesses ; hut before making special reference to this evidence, it is proper that we should state the general principles of law that would seem to he applicable, and which must govern in the determination of the case. The first question is, as to the power of the Steam Packet Company to purchase and hold the stock of the Powhatan Company. This, it is contended by the plaintiffs, could not be done without express authority by law. But, while some Courts have so held, the great weight of authority is the other way.

There is nothing in the charter of the Steam Packet Company, or in the nature of its business, that would, in the slightest manner, forbid the •exercise of such power; and having money to loan or invest, there would appear to he no good reason why it might not invest in the stock of other corporations as well ■ as in any other funds, provided it he done bona fide, and with no sinister or unlawful purpose. The Courts of ⁴³⁴ England, at one time, strongly opposed the right of one-corporation to deal or invest in the stock of another corporation without express authority for so doing; hut that opposition has been entirely overcome, and it is now settled there, that one corporation may deal in the shares - of another, without express authority so to do, unless where expressly prohibited, or the nature of its business render it improper so to deal. Re Barned’s Banlc, L. R., 3 Ch., 105; Re Asiatic Banking Co., L. R. 4 Ch., 252. In the latter of the cases just cited, Lord Justice Selavyn, in speaking of this power of corporations, said, — “As to the capacity of a trading corporation to accept shares in another trading corporation, it is sufficient for me to say that I entirely agree with the judgment of Lord Cairns, in the case of Barned’s Banking Company, viz., that there is not, either by the common or statute law., anything to prohibit one trading corporation from taking or accepting shares in another trading ^ corporation.

There may, of course, be circumstances which prohibit or render it improper for a company so to do, having regard to its own constitution, as defined by its memorandum and articles.” It is in accordance with this statement, that the law is laid down as settled, by Brice, in his work on Ultra Vires, pp. 91, 92. And in this State, the same principle has been fully sanctioned in the case of Elysville Manf. Co. vs. Okisko Co., 1 Md. Ch. Dec., 392, and same case affirmed on appeal, in 5 Md., 152 .

Here, the stock that was purchased on account of the Steam Packet Company was transferred to the names of Robinson and Shoemaker, who held it as trustees for the benefit of the Steam Packet Company; and being thus qualified, they were legally eligible as directors in the Powhatan Company. The fact of their being directors of the Steam Packet Company in no way disqualified them from also being directors of the Powhatan Company. But if there have been as alleged, illegality or impropriety in their acts and proceedings in ⁴³⁵ the management of the affairs of the latter named company, such acts and proceedings are subject to different considerations. It is also alleged and insisted that the $40,000 advanced or loaned by the Steam Packet Company to the Powhatan Company, upon what is alleged to be the security of the steamer Petersburg, was unauthorized by any power contained in its charter; and, upon the principle now perfectly well settled, that a body incorporated for special purposes cannot devote any part of its funds to objects unauthorized by the terms of its charter, it is contended that such contract for loan or advancement was therefore void.

But whether we regard this transaction as being strictly within the powers of the Steam Packet Company, or otherwise, the legal result, so far as the stockholders of the Powhatan Company are concerned, must be the same. If the transaction be treated as a sale and purchase of the steamer, as contended by the defendants, there can be no question as to the existence of ample power; for the charters of both the Steam Packet Company and the Powhatan Company confer express authority to purchase and sell steamers. If, however, the transaction be treated as a loan, secured by mortgage, even conceding that there could be a question of the power of the Steam Packet Company to make such a loan of its funds, the contract being an executed one, that question of power could not be raised on a proceeding like the present. Moreover, in such case, where the parties complaining have received the consideration of the contract, in other respects just and equitable, there is no principle upon which a Court of equity could be induced to interfere upon the mere ground of the want of authority in the adverse party.

Elysville Manf. Co. vs. Okisko Co., 5 Md., 152 ; National Bank vs. Matthews, 98 U. S., 621, 628 ; Silver Lake Bank vs. North, 4 John. Ch., 370. And the same considerations apply to all the mortgages made by the Powhatan Company to the Steam Packet Company. ⁴³⁶ With respect to the power of the Powhatan Company to borrow money and secure the same by mortgage of its property, we can entertain no doubt.

It is true there is no such express power found in its charter; but power is conferred upon its board of directors to make all necessary contracts, and to sell or otherwise dispose of any portion of its property, whenever in the judgment of the directors it should be found to be to the interest of the company. This would seem to be comprehensive enough. But, independently of this, it is now well settled, that corporations, like individuals, may borrow money for the conduct of their affairs, without express authority therefor, whenever the nature of their business may render it proper or expedient. And the power to borrow carries with it very generally, unless expressly restrained, the power to secure the loan by mortgage.

Susquehanna Bridge Co. vs. Ins. Co., 3 Md., 305 ; Australian Steamship Co. vs. Mounsey, 4 K. & J., 133; Green’s Brice's Ultra Vires, pp. 213 to 225, and the cases there cited. Whether the power was properly exercised in this case, or whether it was exercised as a means to accomplish a forbidden and unlawful purpose, as alleged by the plaintiffs, is a question altogether aside from the question of the existence of the power. Seeing, then, that the case presents no-question of ultra vires in the transactions referred to, the next question is, upon what principle or doctrine are the defendants in this case to be held responsible to the plaintiffs for losses, alleged to have been sustained by them,-in-the management of the affairs of the corporation ? • • ■ ■ ' ■ Directors in joint stock corporations are not, in the strict and technical sense of the term, trustees for the stockholders.

The property of the corporation is not vested in them, but in the body corporate. They are, however, in one sense, trustees, and 'they occupy a fiduciary relation to the corporation and its stockholders. ⁴³⁷ They are entrusted with powers which are to be exercised for the common and general interest of the corporation, and not for their own private individual benefit. The confidence reposed in them, and the position they occupy towards the corporation and its stockholders, require a strict and faithful discharge of duty, and they are not allowed to derive from their position, either directly or indirectly, any profit or advantage whatever, except it be with the full knowledge and concurrence of the company, represented by others than themselves. And if this relation and duty be violated, to the injury of the corporation or its stockholders, the law affords an ample redress for the wrong against the guilty parties.

In the English Courts, the case of the Charitable Corporation vs. Sutton, 2 Atk., 400, decided in 1742, is the first that occurs in which the liability of the directors to the corporation for breaches of duty amounting to breaches of trust, is fully and accurately defined. In that case,Lord Habdwicke, in defining the degree of care and fidelity required of a director, and for what nature of default he may be liable, referred to the doctrine of the civil law upon the subject. By that law it is declared that “those who are named by companies and corporations to have the direction of their affairs, are obliged to the same care and diligence as factors or agents. And they are answerable, not only for any fraud and gross negligence which they may be guilty of, but also for all faults that are contrary to the care required of them." 1 Domat, 2 b. tit. 3, sec. 2, Art. 1.

And in that case of Sutton, the Lord Chancellor held, that directors of a corporation are liable in equity to the corporation, not only for gross frauds and breaches of trust, whereby the assets of the corporation are wasted, but are also liable to the corporation, if the assets of the corporation have been wasted by negligence on their part so gross as to amount to a breach of trust. This is the leading case upon the subject, and in which the law is. as ⁴³⁸ strongly laid down as in any subsequent case. The case of Spering’s Appeal, 71 Penn. St., 11, where the decisions are carefully examined, does not carry the doctrine further than the case of the Charitable Corporation vs. Sutton, nor does any other case to which we have been referred.

They all concur in holding that, in equity, the directors are personally liable for the consequences of their frauds or malfeasance, or for such gross negligence as may amount to a breach of trust, to the damage of the corporation or its stockholders. In the case of Overend, Gurney & Co. vs. Gurney, L. R., 4 Ch.,101, and the same case on appeal, reported as Overend, Gurney & Co. vs. Gibb, L. R., 5 H. L., 480, where the question was most elaborately discussed in respect to the negligence of directors, it was held, that facts which may show imprudence in the exercise of powers clearly conferred upon directors will not subject them to personal responsibility ; but if the imprudence be so great and manifest as to amount to crassa negligentia, and consequently a breach of trust, personal responsibility will be incurred. Indeed, all the cases agree that directors are not liable for the consequences of unwise or indiscreet management, if their conduct is entirely due to mere default or mistakes of judgment. And the onus of proof of fraud, combination, or gross negligence, to render the directors personally liable, is upon the party making the charge; and the proof must be clear and manifest.

Turquand vs. Marshall, L. R., 4 Ch., 376; Overend, Gurney & Co. vs. Gibb, L. R., 5 H. L., 480; Hodges vs. New England Screw Co., 1 R. I, 312. In these cases, the proper and primary party to complain and call the directors to an account, in a Court of equity, for fraud or breaches of trust, in the management of the affairs of the corporation, is the corporation itself; because the duty is owing, and the wrong is done directly to the corporation, and only indirectly to the shareholders. ⁴³⁹ And therefore to enable a shareholder, either for himself •alone, or for himself and others, to maintain a bill against directors for such fraud or breaches of trust, he must allege and show, not only the violations of duty or breaches of trust on the part of the directors, but that he as stockholder has been damnified thereby, and that the •corporation has failed or refused to take the proper legal steps for the redress of the wrong. Dodge vs. Woolsey, 18 How., 331 ; Memphis vs. Dean, 8 Wall., 73 ; Robinson vs. Smith, 3 Paige, 222 ; Greaves vs. Gouge, 69 N. Y., 154 ; Peabody vs. Flint, 6 Allen, 52 ; Brewer vs. Boston Theatre, 104 Mass., 378 ; Foss vs. Harbottle, 2 Hare, 461; Thompson on Liability of Directors, 385. But, in this case, if the allegations of the bill are sustained by proof, that a majority of the shares are owned by the Steam Racket Company, and that a majority of the directors are adverse to the interest of the .plaintiffs, and are combined against them, and would, by means of the control that they •exercise, frustrate and defeat any attempt to induce the ■corporation to take action for the redress of the wrongs •alleged; such facts would be a sufficient excuse for not making or alleging a formal demand upon the corporation to take action.

Menier vs. Hooper Tel. Works, L. R., 9 Ch., 350; Mason vs. Harris, 11 Ch. Div., 97; Heath vs. Erie R. Co., 8 Blatchf, 347; Thompson, Liab. Directors, 385, 392.

The Powhatan Company is made defendant as Avell as the Steam Packet Company, and that, in a case like the present, would seem to he essential. Robinson vs. Smith, 3 Paige, 222 . In this case, the fact that Robinson and Shoemaker were stockholders and directors in the Steam Packet Company, as well as in the Powhatan Company, and participated in the transactions