Matthews v. Headley Chocolate Co.

Boyd, C. J., delivered the opinion of the Court. A bill in equity was filed in the name of the Headley Chocolate Company against its former directors, and, demurrers to that bill having been sustained, an amended bill was filed. 'One of the seven directors (Erank O. Headley) was president, and another (Henry W. Matthews) was vice^ president, treasurer and secretary of the company. Henry W. Matthews, O. Jacob Yousa, Thomas E. Fluharty and Henry C. Suchting, being residents, of the. State, were served with process, and the other three-, Charles E. Matthews, George W. Kurtz and Frank O. Headley, being non-residents, were not summoned.

Each of the four who were summoned filed a demurrer to the amended bill, and the demurrers, being overruled appeals were taken by each, but they were argued together and were properly treated as one appeal. The corporation was. organized in this State in 1900, and is engaged in manufacturing, selling and otherwise dealing in high grade chocolates, candies and similar products. The capital was originally $20,000, but several amendments were made and in 1902 it was increased to $100,000, consisting of 300 shares of preferred and 700 of common stock. The preferred stock carries a guaranteed dividend of ten per cent, per annum,- but has no voting power.

The amended bill al ⁵²⁶ leges that some time prior to the year 1908 Henry W. Matthews and Frank O. Headley owned and controlled a majority of the common stock, and that at a meeting of the stockholders, held January 14th, 1908, they, operating together, determined not to re-elect the old board of directors, but to elect a board “composed of themselves and the other defendants hereinbefore mentioned, all of whom were known to be subservient to the wishes of the defendants, Henry W. Matthews and Frank O. Headley, and known to be persons who would not oppose the plan which the defendants, Henry W. Matthews and Frank O. Headley, then had in mind of voting to themselves excessive salaries and compensation, the amount of which will be hereafter more fully set forth.” It is then alleged that Charles E. Matthews, who is a brother of Henry W., owns six shares, .that George W. Kurtz, who' is the father-in-law of Headly, owned seven shares, that Youse, who owned twelve, Fluharty, who owned three, and Suching, who owned seven shares, were engaged in businesses therein set out, and that the continuance of their business relations with the company depended upon the mil of Henry W. Matthews and Frank O. Headley, who controlled the buying of supplies; that an inventory recently taken of the assets of the corporation shows that it had on hand boxes and labels purchased from those three defendants to the extent of $40,000, very largely in excess of any need of the company; that the excessive purchases were made in most cases at prices in excess of the fair market price, and were made by Matthews and Headley with the fraudulent purpose of inducing Youse, Fluharty and Suchting to become pai*ties to the fraud, and that they actually aided and co-operated with Matthews and Headley to perpetrate and accomplish the said frauds. It is alleged that just .prior to the election in 1908, Henry W. Matthews and Frank O. Headley were in receipt of a salary of $6,000 per annum, and the first act of the board was to increase Headley’s salary to $10,000, and that of Matthews to $12,000, “although their duties and the work ⁵²⁷ and labor wbicb devolved upon them were not in any way increased at that time.” It is further alleged that salaries were allowed as follows: To Headley $10,000 for 1909, $12,-000 for 1910, $16,000 for 1911 and 1912, each, $5,333 for 1913, $6,000 for 1914 and $1,800 for 1915, and to Matthews, $12,000 for 1909, $16,000 for 1910, $30,000 for 1911 and 1912, each, $10,000 for 1913 and $12,000 for 1914 and 1915, each. At the meeting of the directors held December 31, 1910, a resolution was passed allowing Matthews extra compensation of $16,000 and. Headley $6,000 “for their good and valuable services rendered the company during the last year.” The bill shows that a dividend of fifty per cent, was declared in each of the years 1910 and 1911, ten per cent, in 1912 and 1913, six per cent, in 1914, and that none was declared in 1915.

In November, 1915, a controlling interest in the stock of the corporation was sold to II. E. Eodda, of Lancaster, Pa., and “certain associates” by Henry E. Matthews1. In January, 1916, a board of directors and new officers were elected and none of the former board were continued. The original bill was filed on the 27th of January, 1916.

It is also alleged that about the 1st of May, 1913, Henry W. Matthews purchased valuable property in Baltimore City, which is described in the bill, and that a considerable portion of the money wrongfully paid from the treasury of the company to him was used in the purchase, that Headley is a non-resident of the State and has no property here except ninety-eight shares of the company’s stock, and that Kurtz, has nothing here except fifty-three shares, of this stock, and the bill prays that they be enjoined from selling, encumber*ing or in any way disposing' of their respective properties. It further prays that the defendants be required to* account for and repay to the plaintiff the sum of $16,000 paid Matthews and the sum. of $6,000 paid Headley on December 31st, 1910, with interest, and that the Court may by its decree declare that the salaries of Matthews and Headley ⁵²⁸ for the years 1908, 1909, 1910, 1911, 1912, 1913, 1914 and 1915', and each of them, were greatly excessive, and that the defendants, and each of them, be required to account to and pay to the plaintiff all sums paid to Matthews and Headley as salaries in excess of such sum, if any, which the Court may find they are fairly entitled to receive for their services, with interest. One of the most important questions presented for our consideration is, whether, under the circumstances, the bill in equity can be maintained in the name of the corporation. It is not denied by the appellants that if the facts be as alleged in the bill, minority stockholders, unless barred in some way, would be entitled to relief, but they contend that the corporation can not properly sue under the circumstances.

They do not claim that the general rule is that a corporation cannot proceed iu equity to obtain redress for. illegal, fraudulent, ultra vires or grossly negligent acts of its directors and officers and that could not well be claimed, for without quoting from them, the cases of Booth v. Robinson, 55 Md. 419 ; Emerson v. Gaither, 103 Md. 564 ; Murphy v. Penniman, 105 Md. 452 ; Thomas v. Penniman, ibid. 475; Gaither v. Bauernschmidt, 108 Md. 1 , and others which might be cited, establish the right of a corporation to proceed in equity in such cases. But the question whether a bill can be maintained in the name of the corporation under such circumstances as are here alleged to exist has not been definitely determined by this Court. It is not alleged that the corporate stock of the company has been in any way impaired, that any creditors have suffered or are in danger of suffering any loss by reason of the alleged acts of the defendants, nor are any facts alleged which show that any one has been or could be injured more than he would have been if the money had been distributed in dividends which the directors could have legally and properly done, so far as the bill discloses, unless it be those who were minority stockholders at the times of the transactions. It is shown that after all the ⁵²⁹ acts complained of, Henry W. Matthews, who was one of the two officers and directors that received the money alleged to have been fraudulently and illegally paid (nearly two-thirds of it having been paid to him) transferred a controlling interest in the company to those who are now claimed to be prosecuting this case in the name of the company, although it is not alleged that they did not get exactly what they bargained for, or that they were in any way imposed on by Matthews.

The bill is peculiar in several respects, but particularly in the fact that it is not shown how many shares of stock were owned by the defendants, or how many by minority stockholders, or indeed how many Matthews sold, except that it. was a controlling interest. It is not in terms alleged that there were any minority stockholders, outside of some of the defendants, but it does in several places speak of “minority stockholders,” and it may be inferred that there were some, other than the defendants, who held shares, although as far as the bill shows, they may have had two, two hundred or more. As it is not alleged that the books of the company are not in its possession, the Court should have been informed asYo how the stock was held, for although the authorities are not uniform on the subject, we can have no doubt that if the holders of all the shares of stock assented to such payments to the officers as are here complained of, and a controlling interest in the company was afterwards transferred, the corporation could not recover the same, or any part thereof—at least unless it was shown that creditors were or might be affected by the payments. If the owners, of most of the stock took part in or gave their assent to such payments, it is difficult to understand upon what principle a Court of equity should give its. aid to any other than minority stockholders, who had no part in the payments or had not acquiesced therein, unless there are creditors or any other innocent parties to be protected through proceedings by the corporation, ⁵³⁰ The bill does, however, state that Henry W. Matthews had a controlling interest in the company, which he sold to Kodda and his associates, and which must have amounted to at least 351 shares, that Headley had ninety-eight, Kurtz fifty-three, Charles E. Matthews six, Youse twelve, Fluharty three and Suchting seven shares—making 530, or 75 5/7 per cent, of the whole, but there is nothing to show that Henry W. Matthews did not have more than 351 shares.

Nor can we be certain that C. E. Matthews, Youse, Fluharty and Suchting did not have more than stated above, as. the bill simply alleged they had those shares in 1908, and in the same connection it alleges that Kurtz had seven, while in the prayer for the injunction against him it is alleged he is the record owner of fifty-three shares, although it does not state when he obtained the additional ones. But assuming that they only had 530 shares, the question is, whether a Court of Equity should permit the company, now in control of other parties, to require the defendants to return to it the $22,000 paid Matthews and Headley as extra compensation and whatever, if anything, may be determined to be in excess of reasonable and just salaries paid them. For illustration, let us assume that there should be a reduction of one-third from the salaries allowed those two for the eight years, that would amount in round numbers to $70,000, which added to the $22,000 would be $92,000. If the minority stockholders held twenty-five per cení, of the stock, and the amount had been declared in dividends, they would have been entitled to $23,000, and those who were directors to the remainder.

If Matthews had retained his stock, assuming he only had 351 shares, his interest in that sum would have been about $16,000, but as he sold to Kodda and his associates, they would, according to the appellant’s theory, get that amount. It is not- shown ' what they paid for the stock,, but assuming they paid par for 351 shares, that amounted to $35,100, while they would get by this claim about $16,000 or nearly $11,000 more than they paid Matthews, or if they paid as much as $130 per share for it, the result would be they would get Matthews’ ⁵³¹ stock for nothing, although, the bill does not allege that they did not get what they contracted for, that the stock of the company was in any way impaired, that any creditors were injured or affected, or even that the corporation was not in a flourishing condition. It is true it alleges that there were 300 shares of preferred stock, but there is not a word as to who owned them, or a suggestion that that stock was injured by the payments complained of. If we assume that the payments were improperly made, the directors could unquestionably and properly, so far as this bill discloses, have distributed those amounts as dividends, which would have affected the security of the preferred stockholders as much as the payments to Matthews and Headley did.

The authorities are by no means uniform as to whether1 a shareholder who becomes such after the acts complained of were committed can sue, and when we determine that question we are still met with the further question whether the suit can be maintained by the company, as this bill is in the name of the corporation. In Home Fire Ins. Co, v. Barber, 61 Neb. 657 , 93 N. W. 1024 , 60 L. R. A. 927, Judge: Roscob Pound discusses the subject fully and ably. That was a case in which the corporation sued, and Judge Pound said: “This raises numerous and difficult questions.

It must be determined whether the present stockholders, or any of them, are entitled to complain of the acts of the defendant and of his past management of the company; for, if any of them are so entitled, there can be no doubt of the right and duty of the corporation to maintain this suit. It would be maintainable in such a case, even though the wrongdoers continued to be stockholders and would share in the proceeds. 1 Morawetz, Private Corporaiions, sec. 294.” In that case all of the stock had changed hands—the parties in control owning every share of it. The Court, therefore, considered the other questions raised, and said, amongst other things, “Sound reason and good authority sustain the rule that a purchaser of stock can not complain of the prior acts and management of the corporation,” citing Hawes v. Oakland, ⁵³² 104 U. S. 450 ; Dimpfel v. O. & M. R. Co , 110 U. S. 209 ; Taylor v. Holmes, 127 U. S. 489; S. W. Nat. Gas Co. v. Fayette Fuel Gas Co., 145 Pa. 13 , 23 At. 224 ; Alexander v. Searcy, 81 Ga. 536 , 8 S. E. 630 ; Clark v. Am.

Coal Co., 86 Iowa, 436 , 53 N. W. 291 , and other cases, as well as 4 Thomp. on Cor., sec. 4569. He further said that “such a stockholder ought not to be allowed to sue, unless the mismanagement of its effects continue and are injurious to him, or it affects him specially and peculiarly in some other manner.” Again, he said: “That stockholders who have acquired their shares and their interest in the corporation from the alleged wrongdoers and through the prior mismanagement have no standing to complain thereof.” The Court in that case said the rule, that a suit for mismanagement can not be maintained by one not a stockholder at the time, had been criticized as based on jurisdictional considerations peculiar to the Federal courts and on obsolete common law doctrines as to champerty and maintenance, and added: “In our judgment, it does not depend upon either,” and discussed the Federal equity rule. While it is true that the Supreme Court did adopt a rule which is known as the 94th Buie in Equity, Judge Pound pointed out that in doing so the question of jurisdiction was not the sole object of the Court. In Venner v. Great North.

R. R. Co., 209 U. S. 24 , Justice Moody said, in speaking of that rule: “But this argument overlooks the purpose and nature of the rule. The rule simply expresses the principle which this Court, after1 a review of the authorities, had declared in Hawes v. Oakland (Hawes v. Contra Costa Water Co.), 104 U. S. 450 , to be applicable in the decision of a stockholder’s suit of the kind now under consideration.” There is, then, much to be said in favor of the construction placed on the rule by Judge Pound. In addition to the authorities cited in Bafl'ber’s Case, there are other decisions by State courts which deny the right of subsequent stockholders to sue if their vendors are estopped from suing by their participation, acquiescence, etc. Just ⁵³³ v. Idaho Canal and Im. Co., 16 Idaho, 639 , 102 Pacific, 381 ; Schilling-Schneider Brewing Co. v. Schneider, 110 Mo. 83 , 19 S. W. 67 ; McCampbell v. F. H. R. Co., 111 Tenn. 55 , 77 S. W. 1070 ; Trimble v. Am.

Sugar Ref. Co., 61 N. J. Equity,