Snow v. Church — 13 A.D. 108

Majority

p. 108

Frederick N. Snow and Others, Respondents, v. George Church and Charles B. Church, Impleaded with Others, Appellants.

Headnote

Trustees—■ combination to retain control of a corporation and to pay increased salaries

A trustee should not use his position as a trustee for his own advantage, nor place himself in' a position where his interest is or may he in conflict with his duty.

A majority of the directors of a corporation, holding a majority of its stock,, agreed to so vote such stock that at all elections of directors three persons to be named by one director and two persons to be named by two other directors should be duly elected; that such majority directors should be continued in office, with a right of substitution in case of their death or resignation; that,

p. 109

whereas theretofore but one of them had been paid, and he a salary of $2,500, he should thereafter receive a salary of $5,000, and that salaries should be paid to the two other of such majority directors as officers of the corporation, to each a salary of §2,500, one of whom was to have the right to appoint a successor.

Held, on a demurrer to a complaint setting forth the foregoing facts, that such agreement constituted an unlawful combination and an abusé of trust.

Appeal by the defendants, George Church and another, from an interlocutory judgment of the Supreme Court in favor of the plaintiffs, entered in the office of the clerk of the county of Rockland on the 9th day of October, 1896, upon the decision of the court rendered after a trial at the Orange Special Term overruling said defendants’ demurrer to the .amended complaint, with notice of an intention to «bring up for review upon such appeal an order entered in said clerk’s office on the 9th day of October, 18.96, directing the entry of said judgment.

Wm. Pierrepont Williams, for the appellants.

F. L. Westbrook, for the respondents.

The- complaint alleges that the Ramapo Iron Works is a corporation with a capital of $125,000, divided into 1,250 shares of $100 each. Of this stock, the plaintiffs together own 216 shares and the defendant directors 853 shares, the balance being owned by persons hot parties to this suit.

At the time of the agreement hereinafter referred to, the plaintiff Frederick W. Snow, the defendants George Church, Charles B. Church and William W. Snow, and one R. J. Davidson, were the directors of the corporation.

On March 16, 1896, the defendant directors entered into a tripartite agreement, whereby they agreed to “so vote the stock held by them respectively in the said Ramapo Iron Works, so long as they shall be stockholders thereof, that, at all elections of directors for said company, three persons, who shall be named for • directors by' the said William W. Snow, shall be duly elected directors thereof, and that two persons, who shall be named for directors by said George 'Church and Charles B. Church, shall-be duly elected directors thereof.”

p. 110

At this time George Church was president and treasurer of the corporation, receiving a salary of $2,500 a year as such treasurer; Charles B. Church was assistant treasurer, without salary, and William W. Snow was vice-president, without salary. The agreement provided that the salary of George Church should be increased to $5,000; that William W. Snow was to receive a salary of $2,500, with the right to appoint a successor; that a new office, to be known as auditor, should be created and filled 'by Charles B. Church, so long as he lived or elected to retain the office, at a salary of $2,500 per year, the salaries, of the three persons being thus increased from $2,500 a year to the aggregate of $10,000, in a company the capital stock of which was only $125,000. The agreement further provided that the defendant directors should “jointly and severally exercise their best endeavors _and use their best influence, and to that end vote both as stockholders and directors of * * * said Ramapo Iron Works, so long as they shall, be stockholders and directors thereof,” to continue the defendant directors in office, with the right of substitution in case of their death or resignation, at the salaries above stated. It also had other provisions for the carrying ■out of this contract.

This agreement was an unlawful combination, entered into by a majority of the directors and owners of a majority of the stock, for the purpose of perpetuating themselves and their successors in office and control of the company, not only during their own lives, but for years after their death, without regard to the rights of a minority of the directors and stockholders. It makes no difference .whether the bargain was morally a corrupt one or not, or whether it was intended to be an agreement for the benefit of all the stockholders of the •company, and in the best interests of the corporation. For the purpose of this appeal the agreement appears to be an abusé of the trust committed to the directors, and, prima facie, is illegal. If it is otherwise, and can, on any state of facts, be upheld (as to which we express no opinion), those facts must be made to appear on trial after answer.

The elementary principle which controls- the execution of trusts is that a trustee should not use his position as a trustee for his own advantage, and that he shall not place- himself in a position where his interest is or may be in conflict with his duty. (Bisph. Eq. § 443;

p. 111

Ten Eyck v. Craig, 62 N. Y. 419 .) The agreement being illegal, it will he presumed to be in jurious to the stockholders.

The judgment overruling the demurrer is affirmed, with costs, with leave to the defendants, within twenty days, to answer upon payment of costs.

All concurred.

Judgment overruling the demurrer affirmed, with costs, with leave to the defendants to answer within twenty days on the payment of costs.