Opinion
10-24-1908
LAWTON v. BEDELL et al.
Anderson Price, for complainant. William T. Carter, Jr., for defendants.
Suit by Lawton against Clinton W. Bedell and another. Decree for complainant.
Anderson Price, for complainant.
William T. Carter, Jr., for defendants.
HOWELL, V. C. (orally). This corporation, by name Lawton, Bedell & Co., was organized under the general corporation laws of New Jersey in the month of October, 1905, with a capital of $3,100, all of which I understand was paid up in some way or other; but concerning that there is no question in this case. The charter contains in its sixth paragraph a provision that the board of directors shall have power, without the assent or vote of the stockholders, among other things, to fix the amount to be reserved as a working capital. The cause of action in this case will turn very largely upon that paragraph.
The corporation began business at the time of its organization. During the first year it made a very small amount of money, $40, as one of the witnesses testifies. But during the second year, and during the third year, it made considerable profits, so that at the end of the third year, or say in the month of March, 1908, it had a surplus which was considerably larger than its capital, possibly twice as large. I think the complainant insists that it was about three times as large; but, at any rate it was a substantial surplus, and consisted very largely of cash in bank. About six months before March, and before the events that happened in March, 1908, Mr. Lawton, the complainant, became dissatisfied with his position in the corporation, and desired either to buy or sell, and made such a proposition to Mr. Bedell. In the meantime, and during the whole of that six months, very little business came in, and, as I take it from the testimony, it was up to Mr. Lawton to see that the business was brought in, and, in fact, he says so, and boasts of his failure to do so, because he says that during the existence of the company he brought in pretty nearly $80,000 worth of business. While there is no testimony that there were disagreements between the two principal owners, I take it that the feeling between them was not very cordial. Mr. Lawton, the complainant, was the holder of 12 shares of the stock of the company. Mr. Bedell was the holder of 19 shares. There was one other share that was held by a man named Talman, which, in October, 1906, was transferred to Miss Bedell, a sister of Clinton W. Bedell. That one share of stock was a qualification share undoubtedly, and belonged to Mr. Clinton W. Bedell. It was put by him in the name of his sister, evidently for the purpose of qualifying her to become a member of the board of directors. She is a school teacher in New York, and does not live in New Jersey, has no interests here apparently; and she thereupon became a director of the corporation. Now the culmination of all this was in the month of March, 1908. At a meeting of the directors held at that time a great many things were done which convince me of the character of this attempted transaction. In the first place Mr. Lawton, without any reason being assigned, was dismissed from employment of the company. He was elected a director, but there was taken from him the office of president, which he had previously held and he was put out on the world without any means of obtaining his livelihood, unless he could get dividends from this corporation. The reason given by Mr. Bedell for turning him out was that it was done for the purpose of reducing expenses. The expense it reduced was $35, the weekly salary of Mr. Lawton, and his traveling expenses, whatever they were; but, in order to offset that, Mr. Bedell immediately raised his own salary from $35 to $40, and there was a continuation of all the other expenses of the business. There does not seem to have been any reduction at all, while in the meantime, and since that action was taken, Mr. Bedell has succeeded in getting two small jobs aggregating, as he says, $3,000 (possibly $3,500 or $4,000), on which the profit is expected to be 10 to 15 per cent., not enough to pay the expenses which have been incurred by him. Since the resolution was passed in March he has been in absolute control; has continued the business; has continued the expenses; has raised his own salary; and has retained a stenographer at $12 a week. He has paid out $500 to a man for commissions for getting business, for which he has received nothing. He has warned the public against trusting Mr. Lawton, the complainant, and seems to have done everything he possibly could in the direction of running the company for his own benefit and advantage, and for the detrimentand disadvantage of Mr. Lawton. Now with this large surplus in cash on the 30th day of March, the board of directors—that is, Mr. Bedell and Miss Bedell—by a vote of two to one, vote not to pay any dividends until the month of January, I think it was 1909. They likewise vote a resolution setting apart $10,000 as a working capital. Now they did not have $10,000 in the treasury to set apart, to start with; and, in the second place, there was no business in sight which required any such sum of money. As I said during the course of the hearing, the mere passage of the resolution to make it $10,000 did not give them any greater faculties or any greater facility for taking on business than they had before, because they had to take on business in order to make money up to $10,000. They could not get it until they took on business and transacted the business and made profits out of it. So I think that the attempt to set aside the $10,000 as a working capital is a clear fraud, and done for the purpose of tying up the surplus of this corporation in the hands of the treasurer so that it would not be possible for Mr. Lawton to get any dividends out of it. The case strikes me very much like the case of Laurel Springs v. Fougeray, 50 N. J. 750, 26 Atl. 880, in the Court of Appeals. In that case there were three men who formed a corporation, and they were equal stockholders, and two of them combined to defraud the third. Here there are three people, although only two having interests, and one of them, the creature of Mr. Bedell, who is not interested in the company at all to any beneficial or considerable amount, but who is a mere factotum, joins with him for the purpose of putting down the other one. It is really one against one. It is really 20 against 12—20 shares against 12 shares. Now no court would stand that kind of a transaction, and I am going to follow the direction of the Court of Appeals in the case of the Laurel Springs Land Company v. Pougeray, 50 N. J. Eq. 756, 26 Atl. 886. Mr. Justice Garrison wrote that opinion, and he says: "Generally, suits to compel the declaration of dividends must be in the name of the corporation, but where the corporation is a defendant, and the majority of directors are parties charged with frauds in this very respect, the suit will-proceed to a decree upon the complainant's rights. In the present case the prayer of the complainant should be met by a decree requiring the defendant, as directors, to declare a dividend of all the net earnings not needed for the legitimate purposes of the company's business." Now the duty of the board of directors under that is to come together and declare a dividend of all the net earnings that are not needed for the legitimate purposes of the company's business. Mr. Justice Garrison says further: "And in order that the matter may remain under the scrutiny of the court, the decree directing the defendants to account and elect as to salary or commissions should be supplemented by requiring them to declare such reasonable dividends, and to do so from time to time as the financial status of the business may warrant, with leave to the complainant to apply to the Court of Chancery for relief in the premises if it be necessary for him so to do." The decree then will be in accordance with the declaration in that opinion.
Now one other thing. The question of salaries ought to be dealt with in this same case. It appears that Mr. Bedell, after turning out Mr. Lawton, raised his own salary to $40 per week, so that during the weeks that have elapsed since the 30th day of March he has drawn the sum of $1,200 in cash from the surplus of the company, because according to his own statement, the profits which he says could be made out of the two contracts that the company was engaged in executing, and which amounted to say $3,000— and there was talk of a little larger sum than that also—would be 10 to 15 per cent. Under those circumstances I do not think that Mr. Bedell has any right, under the ease in New Jersey, to take any such sum of money as that. He voted it to himself; he was the director who was in charge; he was the 20-share man, 1 share standing in the name of his sister. That hardly needs a citation of cases, but I will call your attention to the old case of Gardner v. Butler, 30 N. J. Eq. 702, on that point, which has been followed down to the present time, and the case of Hayes v. Pierson, 65 N. J. Eq. 353, 45 Atl. 1091, 58 Atl. 728, which is quite a recent case, in which the stockholders unanimously agreed upon a salary of $4,000 for the president of the corporation, all done in good faith, too, at the time, and the corporation failed inside of a year and a half. The president of the corporation was required to give up the $4,000 for a good share of that time.
There is one other badge of fraud that I ought to speak of, and that is the denial of Mr. Bedell to Mr. Lawton of access to the books. Undoubtedly, as a director of this corporation, he has the right of access to all of the books of the corporation, because as director he was charged with the duty of knowing what was going on. He could not know what was going on unless he could see the books.
I think that disposes of the case.