People's Trust Co. v. O'Meara , 197 N.Y.S. 795 ( 1922 )

Per Curiam:

There is no attempt here to combine the rights of the cestui que trust with those of the corporation, nor to enforce the trust contained in the O’Meara will in an action brought to enforce the rights of the corporation. The form of the action is quite plain; it is to recover from the defendant directors sums illegally voted and paid to themselves as salaries, and so still belonging to the corporation and recoverable by it; and the prayer of the complaint, among other things, asks for the distribution of these illegal salaries as dividends to the stockholders. (See Civ. Prac. Act, § 258, subd. 9.) The agreement between the defendants and the trustees to pay the trust estate $7,500 yearly instead of dividends, is alleged in the answer as a bar to the maintenance of the action. It became essential, therefore, that its validity be determined because, if valid, it created an estoppel; if not, it did not constitute a bar to any relief to which the plaintiff might show itself entitled. It seems clear that the voting of these salaries was simply, as the referee held, a method of distributing the earnings of the company. Each stockholder was, therefore, entitled to his or her proportionate share, unless the trust estate was estopped to question the agreement by which it received less. Ordinarily, where all the stockholders of a corporation consent and where the rights of creditors are not involved nor the limits of the corporate charter exceeded, any action of the corporation with reference to its property, surplus or assets, may be sustained, although not in accord with the general methods of corporate action. Here all the stockholders, including plaintiff’s predecessors, consented m form to the salaries' voted and paid to the directors by themselves. But the trustees holding capital stock with directions to collect and pay the dividends to the beneficiary, could not, in consideration of the payment to the trust estate by the other three shareholders of a small share of these profits in place of an equitable distribution thereof, surrender to them the right to take the profits of the corporation in lieu of salaries without any regard to the value of their services. The defendants O’Meara were chargeable with knowledge of this Umitation upon the trustees’ right. Such consent was, therefore, void and did not constitute a ratification of the illegal acts of the directors, nor create any estoppel upon the trustee to assert the right of the estate to its proportionate share of the corporate earnings. The referee was authorized to diregt distribution of these so-called salaries when restored to the corporation as dividends. Earnings of the corporation have been distributed in the guise of salaries and such distribution has been unequal and disproportionate to the several stockholders. The judgment simply requires the directors to do what they should have done, namely, distribute such .earnings as a dividend, so that each stockholder shall receive his or her proportionate share.

The judgment, however, should be modified. According to its present provision, the salaries to be restored are $1,136,300, less amount paid trust estate, $82,500, leaving the net amount to be restored, $1,053,800; from this must be deducted the preferred dividends, $13,813, and the balance, $1,039,987, must be divided into fourths, and each of the stockholders, including the trust estate, will be entitled to one of these equal fourths, or $259,997.

But the trust estate has, pursuant to the agreement declared void, already received $82,500, which added to the above one-fourth of the balance directed to be distributed will make a total of $342,497 to be received by the trust estate. In other words, the trust estate receives an excess of $82,500, over and above the amount received by the stockholders. This, of course, is inequitable. The judgment should provide that the illegal salaries be restored to the company, $1,136,300, from which must first be paid the preferred dividends, $13,813, leaving $1,122,487 to be divided into fourths, amounting to $280,621.75; from one of these fourths to be paid to the trust estate should be deducted the amount received by the estate under the illegal agreement, $82,500, lfeaving the share to be paid such estate $198,121.75.

The $82,500 should then be distributed among the defendants O’Meara equally. In this way equality of distribution is secured.

The above computation points out the proper method of distribution. The final figures, however, will be different, because the judgment requires a further modification. The defendants should be allowed reasonable compensation for the services performed by them outside of their official duties (Fox v. Arctic Placer Mining & Milling Co., 229 N. Y. 124), which concededly were important and valuable to the corporation. The case should, therefore, be remitted to the referee to take proof and determine the amount to be allowed for such compensation. The amounts to be restored and distributed in accordance with the above method of computation will, therefore, be proportionately reduced.

The judgment should be modified so as to provide that the amounts of illegal salaries paid the individual defendants which are to be restored to the corporation shall be the amounts paid said defendants as salaries, with interest, less such amounts as may be found to be a fair and reasonable compensation to said defendants for their services to said corporation outside of their official duties, with interest, and the case should be remitted to the referee to make such findings. And the judgment should be further modified to provide that said defendants meet as directors and after deducting from said amount so restored the eight per cent dividend on the preferred stock as in said judgment provided, they pay and distribute to each of the holders of the common stock, viz., plaintiff and said individual defendants, one equal fourth part of the balance of said moneys, deducting from the plaintiff’s share thereof the amounts paid by said ind'vidual defendants under the illegal agreement to plaintiff’s predecessors as trustees, with interest, and that said last named amounts be equally divided among and paid to said individual defendants, and as so modified affirmed, without costs.

New findings and conclusions are directed to be made by the referee in accordance with the order to be entered upon this decision, and new final judgment upon the present record and the said new findings and conclusions shall be entered as a substitute for the present judgment, which new judgment shall also specify the amount to be paid by each defendant, and also the amounts to be received by the parties entitled thereto. The case is remitted to the referee to proceed accordingly.

Blackmar, P. J., Jaycox and Young, JJ., concur; Kelby, J., dissents and reads for reversal and dismissal of the complaint, with whom Kelly, J., concurs.