Mercantile Library Hall Co. v. Pittsburg Library Ass'n

Opinion by

Mr. Justice Mitchell,

This is a regrettable controversy between two corporations occupying to each other practically the position of trustee and cestui que trust, both having the same end and object in view, but differing in opinion as to the time and mode of accomplishment. By the action of the trustee’s agent, its former board of managers, the corpus of the trust has been transferred to the hands and management of the cestui que trust, and while this result is in accord with the purpose of the trust, the trustee complains that it has been done without proper authority, and without due regard for the trustee’s own rights and interests. We are obliged to say that this complaint is well founded.

The notice for the special meeting of the Hall Company at which this lease was authorized was insufficient both in time, and in substance. It was dated and mailed to the members of the board on January 2, and called for a meeting on January 3, at four o’clock. There is no finding by the master as to the hour of mailing nor any evidence that the notices were received by the members before the morning of the day on which the meeting was fixed. Prima facie this was not a reasonable time. The managers are all reported as business men, who cannot be presumed to be ready to drop their own affairs and attend off hand on such a notice. One full day in advance of the time fixed is as little as the law could presume to be reasonable, and in many cases that would be too short. The bylaws or the practice of the particular board could of course fix any time that should be agreed upon, but there is no by-law here, and no sufficient evidence of any practice to supply a rule. Albree, the president, says it was customary to give two or three days’ notice, and Thompson the secretary says that to the best of his knowledge two days’ notice was given in this instance, in which he is admittedly in error.

The notice further was insufficient in substance. It was for a special meeting, with a definite object named, “ to hear the treasurer’s report,” and the few general words added “and transact any other business which may come before them.” It was for a meeting on the last business day that the board would be in existence, prior to the election of their successors at the stockholders’ meeting on the following Monday, and was calculated to convey the impression which Whitney says Williams complained of, that it was a formal meeting to pass on annual reports and similar matters of routine, prior to the approaching stockholders’ meeting. In fact however it was called for business of the most important and most exceptional character, involving the practical surrender of the active duties of the corporate trust.

The meeting thus irregularly called was equally unfortunate in its attendance. The full board of managers consisted of the four principal officers of the Hall Company and five directors, making nine, of whom five were a quorum. By reason of two vacancies at that time there were only seven managers, one of whom, Whitney, did not get the notice in time, and another of whom, Brown, did not attend, for reasons not explained. This left an attendance of a bare quorum of five persons, of whom the master reports that one was not a stockholder, and therefore not legally qualified to be a director, and another was not a stockholder of record though he appears to have held some certificates. These two whose titles were at least questionable, and one other, making a majority of the quorum, knew all about the special business to be put through, for as directors of the Library Association they had been active in having the lease prepared by counsel, and adopted by the association at its meeting on the previous day. It is true that they had on that day resigned as directors of the Library Association, so that at the meeting of the Hall Company on January 8 they no longer technically occupied the positions of directors in both companies, but it cannot be pretended on the evidence that these resignations were not mere formalities in order better to carry out the plan of leasing which prior to such resignations the same persons in their other capacities had prepared. The practical result was that when the board of managers of the Hall Company met on January 3 to consider the lease, three of the quorum present as representatives of the lessor were already committed to the lease in the interests of the lessee, and the vote of these three made the majority by which the lease was approved. The master finds that in this action there was no fraud in fact, and we see no reason to question the correctness of this finding. The gentlemen concerned had no pecuniary interest in the matter and were acting for the benefit of the Library Association, which as already said was the cestui que trust for which this building was originally designed, and to which it was ultimately to go. But the mere statement of the facts is enough to show that the method of proceeding is open to most serious objection.

By this it is not meant to be intimated that the same person may not legally and properly act as director in two corporations, even when dealing with each other. The interests of corporations are sometimes so interwoven that it is desirable to have joint representatives in their respective managements, and at any rate it is a not uncommon and not unlawful practice. But the action of such persons should be open, and free from any suspicion of secret dealing in favor of one principal while acting as the representative of the other. Such action is always open to investigation, and the utmost good faith must not only exist but be made manifest. In the present case we are not required to say whether or not the transaction is so contrary to settled policy that it must be conclusively pronounced a fraud in law, as there are other grounds which are decisive. Before leaving this branch of the case however we may call attention to the difference in Gloninger v. R. R. Co., 139 Pa. 13, cited by appellee, in that the issue of bonds in that case was for payment of an undisputed debt, and was authorized by a vote of the stockholders themselves.

But the lease in controversy here is fatally defective for want of authority in the board of managers to grant it. While the object of the incorporation of the Hall Company was to build a hall for the use of the Library Association, and to lease it and ultimately to convey it to that association, yet the act of 1859 looked to the payment of the stockholders of the Hall Company, and defined with great precision the respective rights of all the parties, including the terms of the contemplated lease. The supplementary act of 1870 relieved the stringency of the former act somewhat as to the terms of the lease, by authorizing it under certain restrictions to be made upon mutual agreement. But it made no substantial change in the rights of the stockholders, and it is not clear how it could have done so without their consent. The act however seems to have been acquiesced in, as a lease for ten years was made under its authority in 1871, and appears to have been lived under until the action that led to the present controversy in 1891. The present lease does not follow the terms of the act of 1859. It is not necessary to go into the discussion of the variations further than to say that by the act of 1859 the Library Association, on taking possession under the lease provided for, was to pay to the Hall Company annually the necessary repairs and taxes, “and in addition thereto á sum not over six per cent per annum on the whole cost of said ground and building,” while under the lease of 1891 the payment is to be four per cent, and that dependent on a surplus of income from rents etc. after payment of taxes, repairs and interest on incumbrances. As these last are necessarily preferred claims, it may well be that the stockholders of the Hall Company would get a larger return under the lease, provided the Library Association is able to keep its covenants, than they would under their own management, but under the act of 1859 they were entitled to keep the management of the property in their own hands until the terms of the act should be complied with, and this was a right of which they could not be deprived except by such compliance, or by their own consent. The lease in question surrenders the control of all the company’s property, divests the company of all its active functions, and practically winds up its existence except for such formal continuance as may be necessary for the receipt and distribution among its stockholders of such payments as the Library Association shall hereafter make. Such an act is not in the management of the current affairs of the company, but is extraordinary and practically final. It cannot be fairly regarded as within the authority committed to the board of directors, but rather as an accepted completion of its corporate purpose and a consequent surrender of its property, franchises and rights which only the true owners themselves, the stockholders, were competent to make.

At the close of respondent’s answer, there were some rather irregular averments that the objections of the present managers of the Hall Company, and the action of the majority of the stockholders, are for selfish aims, and with a view to their own profit rather than to the interests of the Library Association. These we understand to have been stricken out by the court below as impertinent, and they have not been considered as part of the case before us. They are mentioned now only to make this, fact clear. The object of the Hall Company’s corporate existence was to promote the interests of the Library Association. It is a trustee for that purpose and. bound, to act in the utmost good faith to that end. Should it at any time fail to do so, the courts of equity are open to the cestui que trust for redress, and this adjudication will not be in the way.

Decree reversed, bill reinstated and decree directed to be made restoring parties to their respective positions before the lease of January, 1891, was made, but saving intervening rights of tenants who have paid rents, and others.