Bird Coal & Iron Co. v. Humes

Opinion by

Mb. Justice Dean,

The Bird Coal & Iron Company, the appellant, is a corporation ; it is the owner, among other lands, of a tract in name of James Butcher, underlaid with coal, in Snowshoe township, Centre county. The capital stock of the company was 100,000 shares of the par value of 150.00 per share; of these E. C. Ilumes, appellee, owned 21,977. On the 28th of September, 1881, the company leased all the coal on this tract for five years to James Somerville, ata royalty of 15 cents per ton of 2240 lbs.; Somerville covenanted to mine not less that 20,000 tons each year, and had an option of a further period of five years on the same terms; the first five years were to commence January 1, 1882. On October 4,1881, Somerville advanced to Joseph Bird, for the company, f>5,000 on the royalty. With this contract the appellee had no connection; he held no official position in the company; was simply a stockholder. When he learned of the lease, he made vigorous objection, alleging the royalty and annual minimum output were too low, and so he filed a bill in equity against the company, Somerville and J. R. Peale, Esq., the attorney of the company, who was also interested, with Somerville, in the lease, averring gross inadequacy of consideration, etc., and asking that the lease be declared void, and defendants be enjoined from carrying it into effect; a preliminary injunction issued, which afterwards was dissolved. But the lessees, or those interested in the successful operation of it, procured a discontinuance of his suit by agreeing to pay him individually an additional three cents per ton on all coal mined under the lease. Somerville went on then with his mining operations, and near the close of the first five years term ceased mining, alleging that all the marketable coal on the Butcher tract was exhausted.

On July 18,1884, Mr. Humes became a director of the company ; he accepted and served in the office. About the first of August following his election, Somerville and his associates requested a reduction of the rojmlty payable under the lease on account of competition and lower selling price in the market. Correspondence in reference to the matter was then had between Pemberton Bird, president of the company, and Mr. Humes. Bird’s letters are not before us, two of Humes’s are. The first is as follows :

Bellefonte, Pa., Aug. 9th, 1884.

Pemberton Bird, Esq., President,

Northumberland, Pa.

Dear Sir:

I have yours of the 8th, and agreeably to your request have just had a talk with Mr. Somerville in reference to a reduction of the rojralty. lie states that they have lost several large customers, in consequence of their having been underbid by Boak, Orvis & Co., and other parties, and they shall probably lose more unless the price of coal is reduced at least five cents per ton to consumers. Of course, we do not wish to have the mines stand idle, and therefore I have said to him that I would suggest and advise a reduction on the royalty of three cents per ton for the present, and until notice was given to the contrary, we reserving the right to notify them, whenever, in our opinion, the condition of the market would warrant it. If this is done, I think he can induce his men to yield a trifle in order to secure full time.

Truly yours, etc.,

E. C. Humes.

P. S. If this meets your views, perhaps you had better advise me immediately, fixing the time to commence.

The second letter, dated August 26,1884, addressed same as first, is as follows :

Dear Sir:

In reply to yours of 25th, I have to say, that, after some reflection, I have arrived at the conclusion that, in view of the great depression and competition in coal, it possibly might be unwise for us to decline the proposition of Iiarned, Jacob & Co., although I do not quite like extending the time during the year 1885, still, as the projected railroads are opening up a vast area of new territory, it is probable a change for higher royalty will not occur soon, hence I would suggest that we agree to continue the reduction of three cents per ton for one year, say from September 1, 1884, on all shipments over the 20.000 stipulation in the agreement; and this strikes me as reasonably fair, if they are not bound to take out more than 20.000 tons. At the same time, they would have an inducement to exceed this quantity. I shall be satisfied with your making this proposition, and 1 am induced to think they will agree to it.

Truly yours,

E. C. Humes.

Between the dates of these two letters, on August the 16th, 1884, a meeting of the board of directors was had, Mr. Humes not present. The minutes show this business : “ The president stated the object of the meeting was in relation to a request of James L. Somerville and his associates in relation to abatement or draw-back on royalty paid by them on coal. Whereas the competition on bituminous coal is now very great and the price of said coal is quite low, and whereas James L. Somerville and his associates have asked this company to allow them a drawback or abatement on the royalty on coal mined and shipped by them from the company’s land in Centre county, in order that they may compete in the markets; therefore on motion: Resolved, that the Bird Coal & Iron Company give for the time being a draw-back or abatement of three cents per ton on the royalty in favor of J. L. Somerville and his associates, lessees, on all coal mined and shipped from this company’s mines in Centre count}*, provided the said lessees shall mine and ship at least 7000 tons of coal per month. This draw-back shall cease and determine at the pleasure of this company. Carried. Letter of E. C. Humes, director, received August 9,1884, recommending the above resolution oi'dered filed. On motion adjourned. John H. Vincent, secretary.”

Mr. Humes did not disclose the fact to any of his associate stockholders, or to any of the officers of the company at any time, that he had an individual contract, by which he was in the receipt of an extra three cents per ton on all coal mined under the lease, nor does it appear that any of them, during the existence of the lease, had knowledge of such fact. Altogether, Mr. Humes received under his special agreement $8,310.83. It does not appear just how much of this amount was received after the reduction was made.

After the facts became known to the company, it brought an action of account render against Humes, claiming: (1) That, as a stockholder, he had no right to make a secret agreement to receive a special profit, and that the whole of the money, received by him, in equity belonged to the company. (2) That, as director, he induced the company to make an abatement of the royalty, while he was secretly in receipt of a special profit, and the fiduciary relation between him and the company demands that he account to the company for this profit received after his directorship commenced.

After the evidence had been heard for plaintiff in the court below, a compulsory nonsuit was entered, which the court afterwards on motion refused to take off. From that decree, this appeal is taken, appellant assigning for error the refusal of the court to take off the nonsuit.

The learned judge of the court below, in an opinion refusing to take off the nonsuit, very concisely and clearly demonstrates, from both reason and authority, that appellee is not bound to account to the company for any money received by him on his special agreement before he assumed the office of director, about the time the abatement of three cents per ton was made on the 10th of August, 1884.

But as to the second point raised by plaintiffs, he says: “But it was contended that when he became a director of the company there was such a fiduciary relation between him and the company, he would be bound to account for all money received from any dealings in regard to the corporate enterprise: But if we are correct in ruling that there can be no recovery from him for the amount received when he was a mere stockholder, we do not see how liability would attach when he became a director. There was no new contract made, and he did not so manage the affairs as a director as to receive any secret profit detrimental to the interests of the company; he merely continued to receive the amounts due according to the terms of a contract made before he became a director.”

In thus failing to draw a distinction between the duty of the appellee as stockholder and director, we think there was error. There was a radical change in his relations to the company the moment he assumed the office of director. As stockholder, being the owner of his shares absolutely, he had a right to manage his own property as suited his own notions. It is one of the purposes of corporate organization of capital to facilitate the independent enjoyment and use by each member of Iris fractional interest in the whole. But a director is a trustee for the entire body of stockholders, and both good morals and good law imperatively demand he shall manage all the business affairs of the company with a view to promote, not his own interests, but the common interests, and he cannot directly or indirectly derive anyr personal profit or advantage by reason of his position, distinct from his co-shareholders : Potter on Corp., vol. 1, sec. 330 ; Morawetz on Corp. 517, 518. And by assuming the office, he undertakes to give his best judgment in the interests of the corporation in all matters in which he acts for it, untrammeled by any hostile interest in himself or others. There is an inherent obligation on his part that he will in no manner use his position to advance his own interest as an individual as distinguished from that of the Corporation ; Cumberland Coal Company v. Parish, 42 Md. 598 ; Hill v. Frazier, 22 Pa. 320. And all secret profits derived by him in any dealings in regard to the corporate enterprise must be accounted for to the corporation, even though the transaction in which they were made Mso advantaged the corporation of which he was director|: Parker v. Nickerson, 112 Mass. 195. It is a waste of time to cite other of the numerous authorities for these general and familiar principles, for we do not understand them to be questioned. The real contention is, whether the appellee in his conduct has brought himself within the operation of these principles.

This appeal is from a judgment of compulsory nonsuit. The evidence of plaintiff in the court below must be taken as establishing the facts testified to, or apparent from the books and documents submitted; any reasonable inference which might have been drawn from them must also be taken in appellant’s favor. If defendant’s side had been heard, there might have been contradictory evidence of the alleged facts; by his explanations, unfavorable inferences from the facts might have been shown to be wholly unwarranted. But in reviewing this judgment we have nothing to do with his side of the case as it might have been presented. Our duty is solely with plaintiff’s side as it was presented in the most favorable aspect the evidence will warrant.

We assume, then, the existence of this individual agreement was wholly unknown to the company at the time of Mr. PJumes’s election as director, and afterwards, up until the demand for an accounting from him. We may remark, that the fact of it did not necessarily affect his official action. Having been made at a time when he had the undoubted legal right to make it, its existence, if circumstances remained the same, would in no respect warp his judgment or impair his devotion to the interests of the company. So, although it would have been wise to disclose it at the time he accepted the office, there was no imperative duty on him to do so.

But circumstances did. not remain the same. Somerville alleged that owing to increasing and fierce competition in the coal business, his bargain, which had been, when made, a fair one, had become a very hard one, and that he could not continue operations unless the company made a concession in the royalty. The president of the company, Mr. Bird, being ignorant of the special agreement with Director Humes, in all his negotiations with Somerville in regard to a reduction, acted on the assumption that fifteen cents per ton was the whole royalty then being paid. This class of contracts, although called leases, and having some of the legal incidents of leases, are generally, in fact, sales of the coal in place at a price per ton to be paid as the coal is mined. The one before us is a sale of the coal at the price or royalty of fifteen cents per ton, payable monthly. A reduction of five cents per ton was first asked by Somerville, but the company refused to concede this, and whether three cents would be allowed with an increase of the annual minimum output from 20.000 tons to 84,000, became a subject of consideration by the company. If the three cents reduction was made, it would knock off, from the price first agreed to be paid, $2,520 on every 84.000 tons, and, as both parties seemed to estimate, there remained in the tract five or six years’ work, the aggregate reduction from the purchase money as fixed would have amounted to from fifteen to twenty thousand dollars; it was simply a reduction of twenty per cent on the purchase money for all the coal not yet mined; certainly a large concession. So far as concerned the right of the company and the obligation of Somerville, it was a wholly new contract, and resembled somewhat in its features the composition of an embarrassed debtor with his creditor for a release on payment of a part of the debt; Somerville was willing to pay, if the company would accept and release him, eighty per cent of the real debt. In a transaction of such moment to the company, it had a legal and moral right to the best judgment of all its directors, unembarrassed by any concealed antagonistic interest. The president of the board very properly sought the advice of Director Humes, and that very fact indicated the responsibility and power of the director’s office. Somerville had in effect represented to the company he could not pay fifteen cents per ton; both he and Director Humes knew this was false, for the concession of three cents, which he was willing to accept, would be a reduction from eighteen cents to fifteen. Mr. Humes then has a talk with Somerville, and writes to the president, suggesting and advising that the company make a reduction from the contract price of fifteen cents to twelve cents, and the obvious inference from his language is, that this concession should be made because of Somerville’s inability to pay fifteen cents. He gives no intimation that Somerville had actually been paying eighteen cents, three of which went into his own pocket and was to continue to go there, unaffected by the new agreement he was advising the company to make. Was this the truth? If ever there was suppressio veri, it seems to us, on the evidence as it stands, Director Humes was guilty of it, in not at once disclosing that Somerville was able to pay more than twelve cents, and had in fact been paying him, extra to the contract price, three cents per ton. And the inference is, that his advice induced the company to at once reduce the royalty, as they thought, from fifteen to twelve cents, while Somerville and Humes knew it was' from eighteen to fifteen cents. The minutes show this in appending to the resolution this statement: “ Letter of E. C. Humes, director, received August 9,1884, recommending above resolution, ordered to be filed.”

The suggestive interrogatory then is, what was the motive for this disingenuousness and disregard of a manifest official duty ?

If the facts be as appellants on their unanswered testimony claim them to be, then it is not an unwarranted inference that Director Humes made for himself, by reason of his official action, a profit outside of and distinct from the other stockholders, for which he ought to account. It is argued, fairly, that he protected his three cents by getting the reduction on the company’s fifteen.

It is a mistake, however, on this view of the facts, to assume, as appellants have assumed, that the whole three cents per ton belongs to the company. He had the right to receive the three cents at least up until the corporate action of the company, prompted by him, lost it twenty per cent of the contract price, while the director lost nothing. His profit by the transaction is all the company can equitably claim. What was his profit?

As the evidence stands before us, there is no legal conclusion which works a forfeiture of the whole three cents per ton. If on satisfactory proof it had. been shown that a corrupt arrangement had been made, between the director and lessee, whereby, in consideration of the former’s influence in getting the price reduced to twelve cents, he was to have three, of course the profit would have been the whole sum received. But here, the director was in the rightful receipt of three cents; appellant alleges that the understanding fairly inferable from his conduct, and the fact of no change in his three cents, was, that he retained his three cents undiminished because of his influence in securing the reduction by the company, and therefore he must pay over to the company the whole of it. This argument, however, ignores the significance of what plaintiffs failed to prove ; there was no proof that the reduction of the royalty, with the increase of the minimum, was not wise as a business transaction, or that the suggestion of a reduction, in the letter of August 9, 1884, was not warranted by the changed circumstances ; on the contrary, so far as appears, this was a judicious step. If that be so, he must account only for what he gained, by his concealment of a material fact.

Assuming, then, that the reduction was, under the circumstances, a proper one, what reasonable inference as to the director’s profit may be drawn'from the evidence? There ought, says he in substance, to be a reduction of three cents, otherwise the mines will stand idle. A reduction on what? Clearly, as he knew, on the eighteen cents then being paid. He also well knew that President Bird and the other members of the board would act on the assumption that fifteen cents was the royalty then being paid, and if they did as he advised, would reduce the company’s fifteen cents to twelve; would do this because ignorant of a material fact which it was his duty, as director to disclose. If they had known he was in receipt of three cents, while that fact would not have affected the propriety of a reduction, they would have been bound, in fairness to the company, to have insisted that the three cents should be taken from the whole royalty, and not exclusively from five sixths of it, for it was as much the interest of the man in receipt of one sixth to have the mines running, as of those receiving five sixths. His profit, then, by concealment of the truth, was just what he saved in the reduction, one sixth of three cents from ühe time the change by his advice went into effect, and for this ¡he ought to account. Eveu if, to protect his three cents from diminution, merely, he used his influence to saddle the whole reduction on the company, he did nothing which warrants the penalty of forfeiture to the company of that which it had not lost, and to no part of which, before the reduction, it had any pretence of claim.

This discussion of the question is based exclusively on the facts as here presented; as they may present a very different appearance on a retrial, our conclusions then may have no value.

The judgment is reversed, procedendo awarded.