Laurel Springs Land Co. v. Fougeray

The opinion of the court was delivered by Garrison, J.

The bill contains four specific charges of fraud against the defendants :

First. Appropriating the profits by way of payment for services.

Second. Fraudulent conveyance of corporate property to-themselves.

*759 Third. 'Withholding information from the complainant.

Fourth. Failure to declare dividends.

All of these allegations are sustained by the proofs.

The remedy to which we think the complainant is thereupon entitled is as follows:

First. As to salaries and commissions. The decree below setting aside the resolution and putting the defendants to their election between a salary of $3,000 or commissions is affirmed.

Second. As to the fraudulent conveyance of corporate property. The decree sets aside the deeds of conveyance and by its silence as to a reconveyance accepts the restitution set up in the amended answer. This part of the decree is also affirmed.

Third. The right of the complainant to have access to the books of the company in the present condition of affairs should be secured to him by this decree, as the facts amply justify such an order. Stettauer v. New York and Scranton Construction Co., 15 Stew. Eq. 46.

Fourth. The power of the court of chancery to order the directors of a trading corporation to make a dividend of unused profits when they improperly refuse to do so is undoubted. The shareholders in such concerns not unreasonably expect to enjoy the fruits of successful enterprise in stated distributions of profits. When the by-laws are silent upon the subject the directors are invested with a discretionary power with regard to the time and manner of making such distribution, and so long as they act in the exercise of an honest judgment their authority is absolute. Where, as in the present case, the corporate scheme contemplates “ the buying, selling, exchanging and improvement of real estate” during a corporate life of fifty years, it is evident that the power to determine how much of the current earnings shall be reinvested in the business must reside somewhere, and by the implied concurrence of the shareholders this right is committed to the board of directors; but there is also an implied condition that the confidence thus reposed shall be honestly exercised with reference to the avowed purpose of the company.

When the business of a trading corporation has by management been brought to a condition of financial prosperity, *760 in which the profit, after the payment of all indebtedness, is more than twenty times the amount of the original capital, a reasonable share of the net earnings should be applied to the payment of stock dividends, though a part be reserved to enlarge the business itself. In the present case there was no proof of any honest purpose to enlarge the business of the company, the withholding of the dividends being a mere pretext for an opportunity to absorb the profits by fraudulent devices. 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 fraud 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 defendants, as directors, to declare a dividend of all the net earnings not needed for the legitimate purposes of the company’s business. 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. Further the decree should not go. So much of it as appoints a receiver and puts him in possession of the property of the corporation and directs a transfer to the complainant of a part of its net assets and a conveyance to him in fee of one-third of the unsold real estate must be reversed, as must also the injunction by which the business of the corporation was stopped.

The frauds of these defendants as directors of this corporation are all capable of adequate remedy and complete redress by the court within the principles of remedial and preventive equity. This being so, the court was not justified in a decree of first instance in stopping the business of a solvent company and taking possession of its affairs for the mere purpose of aiding the withdrawal of the injured party with a proportionate share of the corporate property and its increment, assuming such jurisdiction *761 to exist in any case in the first instance. In case of a contumacious disregard of its decrees, a court of equity has and may put forth powers of a compulsatory and punitive character greatly in excess of those exercised by it in its ordinary remedial jurisdiction. To justify the employment of these extraordinary powers there should be, however, something more than an apprehension that the frauds redressed, or others of a like nature, will be repeated in the face of the decree forbidding them.

The dismemberment of a corporation, even though it be a trading company, and the part distribution of its assets to a shareholder who is permitted to withdraw under the protection of the court, coupled with the disturbance of corporate functions incident to a receivership, are extreme powers and may not be decreed by a court of equity when the specific acts complained of are capable of redress and complete restitution and those apprehended fall within the ordinary jurisdiction by injunction.

The decree will be reversed, without costs, and remitted to the court of chancery in order that a decree may be entered in accordance with the views herein expressed.

For reversal—The Chief-Justice, Depue, Dixon, Garrison, Mache, Reed, Lippincott, Van Syckel, Abbett, Bogert, Brown, Smith—12.

For affirmance—None.